Ivo P. Baumgartner
Taxation of liquidation gains on cessation of self-employment
Workshop on the occasion of the ISIS) seminar of 22 November 2018 entitled "Taxation of Capital Payments
Case 1: Sale of a sole proprietorship with transfer of a property into private assets: Determination of the liquidation profit
Peter Müller was the owner of an architectural office, which he ran on the ground floor and first floor of his property. On the 2nd floor he lives together with his wife in an 4½ room apartment. He was voluntarily affiliated to a pension fund.
In 2012 Mr. Müller turned 62 years old. He decided to sell the company at the end of 2012 to the AG (the "ARCHITECTURAL AG") founded by an employee for this purpose and to retire early. Peter Müller also withdrew his pension fund assets in the amount of CHF 500,000 in 2012, and will lease the premises of the architectural office (two floors of the building) to ARCHITEKTUR-AG.
In 2011, Peter Müller achieved a net profit (before AHV provisions) of CHF 350,000, of which CHF 150,000 came from realised hidden reserves. The net profit (before AHV provisions) for 2012 amounted to CHF 600,000, of which CHF 400,000 was attributable to realized hidden reserves (including goodwill). This amount also included the (capital) profit from the transfer of the property to private assets (book value CHF 600,000; investment costs CHF 700,000; market value CHF 850,000).
In 2013, Peter Müller submitted the auxiliary form for determining the liquidation profit together with the 2012 tax return. He did not claim a fictitious purchase in this case. However, he applied for a tax deferral in accordance with Art. 18a para. 1 DBG (or Art. 8 para. 2bis StHG).
- Calculate the privileged taxable liquidation profit and the ordinary taxable income from self-employment in 2012:
The liquidation costs are negligible; there are no offsettable losses from the previous year.
- At the time of filing the 2012 tax return for the 2011 tax period, the Müller couple has already been legally assessed. Does this change anything about the situation?
- Is the capital withdrawal from the 2nd pillar included in the special investment for liquidation gains?
- In 2018, Mr. Müller will sell the property for CHF 900,000. no investments in the property were made in the period between the purchase (end of 2012) and the sale of the property (2018). At the time of the sale - apart from the different tax rates - does it matter whether the property is located in the canton of St. Gallen or the canton of Bern?
Peter Müller is not selling his sole proprietorship, but will contribute it to the newly founded MÜLLER ARCHITECTUR AG with neutral income tax implications as of 1 January 2013. He also transfers the property to MÜLLER ARCHITEKTUR AG.
In the course of 2016, Peter Müller suffers a stroke, whereupon he searches for a successor solution. By contract dated 31 October 2017, he sells all shares in MÜLLER ARCHITEKTUR AG (including the property held by the AG) to a competitor for CHF 1 million. The assignment of the (unissued) registered shares of MÜLLER ARCHITEKTUR AG will take effect on 1 July 2018; the purchase price will then also be paid.
Will the sale of the shares have tax consequences?
Case 2: Disability and definitive cessation of self-employment
Franz Haag ran a bicycle and motorbike shop in the city of Zurich as a sole proprietor for many years. In his free time he liked to go on rides with his Moto Guzzi.
In 2011, at the age of 40, Franz Haag suffered a serious accident while riding his motorcycle. Since then he has had very limited working capacity and receives a full disability insurance pension. Its residual earning capacity amounts to 20 %. In order to be able to continue his business, he hired a workshop manager at the beginning of 2012, whom he supported - as far as his health allowed - in administrative and sales matters.
In 2018, Franz Haag's state of health deteriorates further. He has been fully incapacitated since a stroke. Due to this new situation, he decides to sell his business to the head of the workshop as of 1 October 2018. In doing so, it realizes hidden reserves in the amount of CHF 200,000.
- Does Franz Haag meet the requirements for claiming the privileged liquidation profit taxation?
- What would have been the situation if Franz Haag, who is very wealthy, had waived the right to receive disability insurance benefits after his accident, even though his disability was certified by a doctor's certificate?
- What would have been the situation if Franz Haag had died in the accident and his business had subsequently been liquidated by his heirs (the two daughters)?
Case 3: Definitive cessation of self-employment
Hans Blatter ran his own farm (dualistic canton). At the end of 2015, when he was 63 years old, he sold the farm and various plots of land to his daughter, who already ran her own farm, for CHF 500,000, but who capitalised only CHF 250,000 in her books, which corresponded to the balance sheet value (capitalised earnings value) for Hans Blatter.
When Hans Blatter sold the farm, his daughter granted him a usufruct for five years on a plot of land with a Christmas tree. In 2016, it generated income of CHF 60,000, with salaries paid to temporary staff totalling CHF 4,200.
- Does the transfer of the book value constitute a privileged situation for income tax purposes?
- If no deferral is granted, is the profit (here CHF 250,000) taxable separately?
- If separate taxation should be possible in principle, is the activity undertaken after the sale (sale of Christmas trees) harmful to it?
Case 4: Determination of qualifying hidden reserves: Changes in behaviour before liquidation
Heinz Semadi is a lawyer and ran his own law firm with notary's office. He relinquished his position as of 30 June 2017. As in the past, Heinz Semadi invoiced according to the target method (agreed fees). In the most recent financial statements (2017), it released a provision for third-party work (foreign correspondents) of CHF 100,000 created in 2015 to the income statement. This had been accepted by the tax authorities in the assessments for the tax periods 2015 and 2016 or had not been offset. As all receivables were invoiced, the item "outstanding balances" then grew strongly compared to previous years. Heinz Semadi reported the "change in accounts receivable" and the reversed provision as a privileged liquidation gain in the 2017 tax declaration.
- Will the provision dissolved in 2017 be subject to the privileged liquidation profit taxation?
- Is the debtor change subject to privileged liquidation profit taxation?
- What would have happened if the subsequent invoicing of customers had already taken place in the previous year by the initial accounting of work in progress?
Case 5: Determination of qualifying hidden reserves: Changes in current assets
Hugo Portmann was the owner of a garage (motor vehicle concessionaire) with workshop and filling station (in the canton of St. Gallen). He sold his company at the end of 2016 (at the age of 60) to a competitor with various branches in the region for a price of CHF 3 million (book value of equity CHF 2.5 million).
It is known that in 2015 a small truck used for snow removal and driving school was subject to immediate depreciation. This was acquired at the beginning of 2014 and was subject to ordinary depreciation in that year (20% linear p.a.).
Hugo Portmann has significantly increased the "goods reserve" (lump sum value adjustment) on the warehouse in 2015 (from 15% to 30%).
- How is the fact of immediate write-offs to be assessed with a view to determining the liquidation profit to be taxed separately?
- How is the situation with the increased third of goods to be assessed?
- How would the situation with the third of goods be assessed if the value adjustment in previous years had always been 30 % and in 2016 CHF 150,000 had been released due to a massive delivery bottleneck of the importer (or the plant) and the associated reduction in stock?
Case 6: Determination of liquidation profit: calculation of notional purchases, treatment of actual purchases and surplus contributions
Martina Looser (born on 28 February 1955) operated a furniture and interior design business in the legal form of a sole proprietorship for 30 years. She retired on 31 July 2018.
Before she became self-employed, she was an executive at a chain of retail stores. On termination of her employment she drew the entire pension fund assets of CHF 150,000 for the start of her self-employment.
During her self-employment she was voluntarily affiliated to a pension fund. From time to time she then paid into the pillar 3a scheme. In 1995, she made an advance withdrawal of CHF 50,000 from her pillar 3a account to purchase a condominium; she has been living in it herself since then.
As part of the liquidation of the sole proprietorship, it realizes hidden reserves of CHF 200,000, half of which will be realized in 2017 and half in 2018. She draws the pen- sion fund assets (amount at retirement: CHF 400,000) in pension form. She still has a Pillar 3a credit balance of CHF 100,000.
In recent years Martina Looser has achieved the following net profits (AHV can be disregarded):
2018: CHF 200,000 (including hidden reserves)
2017: CHF 250,000 (including hidden reserves)
2016: CHF 150'000
2015: CHF 150'000
2014: CHF 150'000
2013: CHF 150'000
- How much is the liquidation profit? To what maximum amount can a fictitious purchase be claimed?
- What would have changed if Martina Looser had made a purchase of CHF 150,000 into the 2nd pillar at the beginning of 2018?
- What if Martina Looser had renovated her condominium in 2018 and the deductible property maintenance costs exceeded the other income?