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The value of a trail book has historically been associated with its ongoing revenue stream. This approach is being increasingly rivalled by brokers who are selling their trail books in whole, or in part, to aid the various stages of their business’s life cycle — whether to enable growth, pay down debt or alleviate cash flow.
The rise in using a trail book as a “self-funded” capital injection is fuelled not only by obtaining immediate cash flow but also the ability to continue to write new loans and refinance old loans (while receiving future upfront and trails from these new loans).
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“There are always interesting twists and turns for astute brokers who are open to alternative financial solutions and business practices,” said Nick Young, managing director at Trail Homes.
“What may be less known is that a trail book sale can also provide a substantial tax break through both small business and capital gains tax (CGT) exemptions. While the opportunity has considerable financial benefits, it’s also time-sensitive as it’s expected that [the] Labor Party will rein in many of the current capital gains tax concessions, should they win the next election.”
Justin Mastores, managing director of the Melbourne-based accounting and advisory firm, Rees Group, said: “There are a number of tax strategies and CGT exemptions that brokers may be eligible for when considering the sale of a trail book.
“A trail book may be exempt from CGT if it falls under the definition of an ‘exempt asset’. This means the asset must be owned by the business, considered for a ‘taxable purpose’ within the business and be depreciating, in that it has a limited life that can be expected to decline over time. In this case, so long as the sale value does not exceed the future value of the trail book, then CGT may not apply.
“Separately, the business could be entitled to a 50 per cent CGT ‘active asset’ exemption, if it has a turnover of the taxpayer and its connected entities are less than $2 million per annum, and therefore classified as a small business entity. This is also affected by whether the business is owned in their own name or through a trust. While it might sound convoluted, the savings can translate to some serious funds.”
Mr Mastores added: “By way of illustration, for the hypothetic sale of a $500,000 trail book, without any CGT discount, you’d expect to have to pay tax on $500,000 capital gain. Conversely, the sale of a $500,000 trail book that met the relevant criteria (held for greater than 12 months), and had a full CGT discount applied, would reduce the capital gain by 50 per cent to $250,000. If you’re a small business entity, you might also be entitled to a further 50 per cent CGT ‘active asset’ reduction, which then further reduces your capital gain by 50 per cent, potentially taking the $250,000 capital gains to $125,000; hence retaining an extra $375,000 of your trail book revenue in your bank account.”
In addition, if brokers owned the business and had a trail book for over 15 years, they may be entitled to a 15-year CGT exemption (assuming that the trail book and associated net assets, excluding the family home and amounts in super, are valued at less than $6 million). The upside of this approach is that they don’t need to be of retirement age, which is considered to be at least 55 years old. It’s, therefore, a smart retirement strategy for a broker, whether they’re in their 30s, 40s or 50s.
At a practical level, it’s worthwhile for new brokers to structure their entity wisely from the outset to both be tax-effective and protect their assets (keeping in mind that an infant business can often be restructured without paying any tax). Also, the right entity structure can directly benefit eligibility for future business loans and general business expansion.
Exemptions will be affected by how the business is structured, how long the broker’s been in business and what the partner relationships look like. When starting a new broking firm (or for firms less than two years old), Mr Mastores suggests involving an accountant to determine:
- The best company structure for tax and assets;
- How to structure a partnership;
- Whether you need a family trust and how it may affect assets (family and other);
- The best way to structure employees;
- Whether the structure will limit or enhance the ability to borrow money in the future;
- The most effective structure exiting the business in due course; and
- Whether the company is eligible for CGT exemptions, including the small business 50 per cent CGT exemption.
Alternatively, for more established practices, it’s equally pertinent to involve an accountant to determine:
- Whether the current structure is the best way to manage income tax and CGT (and if not, whether it can be restructured without any tax implications);
- If a partnership should be restructured;
- If your assets are protected with the current structure (including family assets);
- Whether the structure is set up to allow future acquisitions and growth;
- If the structure is the most effective for exiting the business in due course; and
- Whether the company is eligible for the CGT exemptions, including the small business 50 per cent CGT exemption and/or the 15-year exemption for CGT.
“Keep in mind that everyone’s situation is different,” Mr Mastores said, “but the commonality is that there’s an immediate opportunity for every broker to be a more efficient operator with greater financial gain when guided with the right advice.”
