How to put more money in your pocket when selling a business
As a business owner contemplating the sale of your business, one of the most important things you need to consider is the tax implications surrounding the transaction.
After putting years of blood, sweat and tears into your business the last thing you want is for your profit to be consumed by the tax man due to poor planning.
To assist business owners, we have highlighted a few questions to keep top of mind to help reduce the amount of tax you pay, if you plan ahead.
What are your terms of sale – shares or business?
A critical negotiation point is what you are selling – whether you are selling the business and its assets, or whether you are selling the entity which holds the business. This consideration is dependent upon many things, not the least of which is the access to the general Capital Gains Tax Discount.
If you are selling the shares in the company, a buyer may be reluctant to take over the entity in its entirety, even with the best due diligence on their part. The buyer may have a desire to acquire the assets alone.
Similarly, the buyer may want not just the business, but you as well (especially if you are an integral part of the business success). In such circumstances it may be possible to structure a hand-over period that suits you, or retention amounts or earn-outs that meet both side's needs.
Each situation is different, and it may be possible for you to structure the sale to take advantage of the capital gains tax discount as well as other tax concessions, in a way that satisfies both your interests and those of your buyer.
Are you aware of potential CGT concessions?
If you are a small business one of the most important things to keep in mind is how to make the most of the small business capital gains tax (CGT) concessions, since these can drastically reduce – or in some cases completely eliminate – the tax payable on the profit made from the sale of your company. If you meet the required conditions, you will find these concessions extremely valuable.
The concessions are generally applied after the CGT discount and, while there can be tax savings when the concessions are used to sell your business assets, they usually provide greater benefits under a share sale, and it’s easier for your shareholders to access the funds.
The concessions can be used when a business has either “aggregated annual turnover” of less than $2m (the Small Business Entity or SBE test) or total net assets of less than $6m (the Net Asset Value or NAV test), subject to certain grouping rules involving related entities and individuals. The NAV test includes assets of controlling individuals, but specifically excludes the family home, superannuation balances and personal use assets (such as boats, cars and holiday homes).
Exemptions available under the Small Business CGT Exemptions (if all conditions are met) are:
- Capital Gains tax 15-year asset exemption – if you are aged 55 or older and retiring, and your business has owned an asset for at least 15 years, you will not pay CGT when you sell the asset
- CGT 50% active asset reduction – If you have owned an asset to conduct your business (an ‘active asset') you will only pay tax on 50% of the capital gain when you sell the asset. This is in addition to the 12-month (General) CGT Discount, so an overall effective discount of 75%.
- CGT retirement exemption – There is a CGT exemption on the sale of a business asset, up to a lifetime limit of $500,000 per individual. If you are under 55, money from the sale of the asset must be paid into a complying superannuation fund. If you are over 55, you may be able to take the cash tax free to put toward your eventual retirement.
- CGT roll-over – If you sell a small business asset and buy a replacement, you can roll over your CGT liability, to the value of the replacement asset. This means you will not pay any CGT owing until you sell the replacement asset.
There is also small business restructure roll-over relief making it easier for small business owners to restructure their business to allow them to defer gains or losses that might be relevant in planning for the business sale. It’s important to consult a specialist tax adviser to determine whether your business can satisfy any conditions to take advantage of CGT concessions.
What other tax considerations should you look out for?
It is important for you to look at the level of retained profits and associated franking credits for your company before the sale. While it is common for a share sale agreement to require any profits to be paid out as dividends to the existing shareholders prior to settlement, it is better if you plan to make dividend payments over a number of years, instead of paying large dividends just before the sale.
A related issue is the ownership structure of the operating company. If you are the sole owner of all the shares in your company, dividend payments make their way solely to you. However, if you are one of several entities who own shares, then any dividends will be split amongst all the shareholders, and it is more likely that at least some of the payments will be taxed at lower marginal rates. Be wary of having separate classes of shares with special dividend rights, however, as this can make applying the small business CGT concessions on a sale much more difficult.
To understand what you can do to prepare your business for sale and to maximise the after tax proceeds please speak with your usual Mazars adviser or contact:
Brisbane – Jamie Towers
Melbourne – Brad Purvis
Sydney – Dean Newman
+61 7 3218 3900
+61 3 3458 0000
+61 2 9922 1166
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice. Content valid as at date published.
Published: 21 August 2019