What You Should Know Before Selling a Business?

As business owners, you ensure that you are getting what your business is worth in the time of sale. You deserve to get the most out of it as you’ve brought the business to where it is now.

However, there are some tax implications that you should consider when selling your business which should be managed with the help of a professional.

How are tax rates calculated?

The sale of a business is typically regarded as a part of income which is taxed depending on the tax rate applicable to the business structure. In Australia, sole traders and trusts or company structures are the most common structures.

There is a substantial profit when selling a business that is a from a sole trader or trust entity. The sale is often subject to high individual tax rates, depending on the sale price. These typically ranges between:

Meanwhile, tax rates for a company are calculated differently from sole traders and trusts because it is normally assessed in Australia at a nominal tax rate between 25% and 30%.

Capital Gains Tax

Regardless of the business structure, selling it in Australia is treated as the sale of an asset which means you have to pay capital gains tax.

A capital gain is experienced when a company is sold for more than what it originally cost to start up.

The amount of capital gains tax (CGT) relies on different factors, such as:

• The cost base is the original start up cost for the business. It is the purchase price for a business owner who bought an existing company. However, if you started the business, you could have a cost basis as low as $0.
• The sale price of the business.
• The tax structure of the business on sale. Some structures can manage tax responsibilities more effectively than others.
• Any tax concessions that the business sold is qualified of which will be discussed below.
• The income you earned for the financial year of the sale.

Example:

Alex decides to start a coaching business and with the growth of her client base, she now have an annual salary of $200,000. She is taxed at the nominal tax rate of 47%.

Alex then decides that she wants to sell her business for $500,000. Since Alex did not purchase the business but started it on her own, her cost base is $0 which prompt a capital gain of $500,000 on its sale.

Since the capital gain from the sale of the business is added to her personal income, it is also taxed at 47% which potentially adds $235,000 to Alex’s taxable income.

The example above proves that following a solid tax strategy is important to minimise the tax obligations incurred in the sale.

Tax Minimisation Strategies for Selling a Business

The proper usage of capital gains tax concessions can significantly reduce the total tax amount of tax payable for the business sold to $0.

Small business benefits most from tax concessions, and in order to qualify as one, they must:

• have less than $2 million for annual turnover, or
• hold less than $6 million in net assets

If the business your selling meets the criteria above, they  might be able to use the following tax concessions:

1. 50% Active Asset Reduction
   – Active assets are assets that have remained active and operational for at least half the time the business is owned. Active asset can be eligible for a 50% discount when sold.
2. 50% CGT Reduction
   – A business owned for over 12 months by sole traders, individuals, and trusts can be eligible for a 50% reduction on CGT.
3. Small Business Rollover CGT Concession
   – When selling an active asset, you have the option to roll the capital gain generated into a replacement asset. Business owners have to find a replacement in two years after the sale and the rollover amount can reduce the cost base of the new asset.
4. 15-year CGT Exemption
   – If the business is more than 15 years and the retiring business owners are over the age of 55, they might be eligible to be exempted.
5. Retirement Exemption
   – The capital gain amount must be deposited to a nominated super fund in order to be eligible for this exemption if you are under 55 years old. Business owners at the age of 55 are tax-free. The retirement exemption allows up to $500,000 of the CGT to be exempted during the sale.  

Businesses under a company structure have access to a number of advantages that differ slightly from those accessible to small businesses:

1. 50% CGT Reduction
   – A company sold as part of a share sale is eligible for the above-mentioned 50% capital gains tax reduction but a company sold as an part of an asset is not eligible.
2. 15-year CGT Exemption
   – If the owner of a company-structured business have held it for more than 15 years and are retiring, they are eligible for a total exemption from CGT on the sale of the business.
3. Active Asset CGT Reduction of 50%
4. Retirement Exemption
5. Rollover CGT Concession
   – The owners can use the replacement asset CGT rollover by having the sale proceeds be a share capital for a new business.

Two Options to Sell a Business as a Company

1. Asset Sales
   – Selling a company’s asset (property, land, equipment, or stock or goodwill) is referred to as asset sale.
2. Share Sales
   – A share sale occurs when a company’s shares are sold, which grants the buyer control of the company. Share sales are usually less favoured by purchasers because it enable the seller to sell the company’s legal existence, including outstanding debts.

Determining which of these two is more tax efficient can be difficult sine there may be contradictory tax and commercial ramifications when choosing one over the other. To get an ideal tax outcome and maximize net gains, the sales procedure must be meticulously planned.

Business owners should have an advanced planning to be able to take advantage of the CGT concessions available which helps in minimizing the tax payable for the sale.

Important Things to Note

Most of the time, planning for a business’s sale should begin as soon as it is founded. This gives business owners the option to choose a structure that offers them the optimum capital gains tax concessions.

Business owners who anticipates the expansion of the business may believe that a company structure is the most tax-efficient option. In many instances, shares held in a family trust are the best way to run company-structured businesses. The business can be eligible for a tax reduction of 50% on capital gains as a result.

A business owner who is thinking about selling an existing company must carefully prepare their sales approach and take into account any potential tax implications. In many circumstances, a company’s sale rate might push its assets over the $6 million threshold required to qualify as a small corporation, disqualifying them from the 50% capital gains tax discount.

It is important to get the right support and advice to help you have a lower tax payable in the sale of your business.

Star Advisers can help you create an advanced tax planning to ensure that the sale of your business is tax effective. Have a consultation with us to be confident in every business situation you will face!