Do you intend to sell your company? Listed below are some tax advice for Australian citizens.
What steps are involved in selling a business in Australia? Before putting it on the market, you'll need to get other things in place in addition to hiring an accountant and attorney. For instance, the consent of the shareholders will be necessary if you plan to conduct an asset sale or share repurchase.
What is taxable income when selling a firm, to begin with? This is outlined in the Income Tax Assessment Act of 1997 (ITAA). This blog post includes guidance on how to financially prepare for such a journey as well as some taxation essentials. Explore more below!
The Australian Taxation Office is a government organization that offers tax guidance and information to Australian citizens. This article includes a list of practical suggestions for setting up your business to sell it fast and profitably.
My love for entrepreneurship has never wavered throughout my entire life. My father started his business from scratch when I was very small, and I have been greatly inspired by this throughout the years. But as time went on, he ultimately made the decision to retire and sell his company, which made both of us very happy (and relieved!).
How To Sell Your Business In The Most Tax-Effective Way
What Taxes Am I Owed When I Sell My Business?
You want to be sure you're getting what your business is worth when the time comes to sell it. You brought the company up to where it is now, therefore you deserve to enjoy the results of your labor.
However, there are certain tax considerations associated with selling your firm, which you shouldn't attempt to manage without professional assistance.
Tax Rates for Business Sales in General
Due to the fact that the proceeds from the sale of your company are considered to be a component of your company's taxable income, they are subject to taxation at the rate that corresponds to the structure of your firm.
Trust structures and sole proprietorships
If you are in the process of selling a company, you will almost certainly realise a substantial gain from the transaction. Accordingly, depending on the purchase price, you will typically be required to pay a tax rate that falls within one of the highest individual tax rates.
Sole proprietors and trust-based business structures
$90,001 – $180,000 $20,797 plus 37% on each $1 over $90,000, + 2% Medicare levy
$180,001 and over $54,097 plus 45% for each $1 over $180,000 + 2% Medicare levy
Knowledge of Capital Gains Tax
No matter how your company is set up, selling it is regarded as selling an asset. Due to the fact that you made a capital gain on this sale, you must pay capital gains tax.
To put it another way, the profit you get from the sale of an asset is the definition of a capital gain.
Therefore, if you sell your company for more than it cost to start, you've made a capital gain from the sale of your company. This results in a capital gain event that is taxed on capital gains (CGT).
When you sell your company, the amount of capital gains tax (CGT) you are required to pay is determined by five factors:
- Your cost base, or how much it initially cost you to start the business If you bought your company, your cost base is the price you paid. Your cost base may be as low as zero if you created the company yourself, literally "from nothing."
- The cost of buying out your company.
- the tax system that your company is subject to. Tax minimization is more effective with some structures than others.
- The tax concessions that your company is qualified to receive. The tax you pay can be significantly reduced by a number of tax incentives, which we detail below.
- the income you brought in the fiscal year that you sold the company.
Let's examine a case in point.
Example
John is now making an annual salary of $200,000 thanks to the growth of his clientele and his own accounting firm, which he established. In spite of this, he is subject to taxation at the rate of notional 47%.
When John decides that it is time to sell his company, he makes an offer of $500,000 to a buyer who is interested in purchasing it. He invested no money into the beginning stages of his company; hence, the sale of his business brought him a profit of $500,000 in capital.
Because the capital gain is included in John's personal income, he will be subject to a tax rate of 47% on the gain, which could result in an increase of up to $235,000 in his taxable income.
Because of this, you need to make sure you do your research before selling your company.
Tax-Minimization Techniques for Business Sales
When used properly, the CGT tax breaks available can help you reduce the amount of tax you have to pay when selling your company. You could even be able to get the tax reduced to zero in some circumstances.
Small firms that meet the requirements can take advantage of a number of tax breaks to lessen the financial burden of their CGT.
You are considered a small business if:
- You generate less than $2 million in revenue;
- Your net worth is under $6 million.
Following that, you have access to the CGT concessions listed below.
You get a 50% discount on the CGT amount of your sale if you own your business for 12 months or more as an individual, single proprietor, or trust.
If you are 55 years of age or older, retired, and have continuously held your company for at least 15 years, you are eligible for a total capital gains tax deduction on the sale of your business.
At least fifty percent of the time that you have had an asset, it must be used and in working condition for that item to be called "active." For example, a firm is considered an active asset in this context.
When you sell an active asset, you are eligible for a CGT reduction of up to fifty percent.
You can overlook up to $500,000 of your capital gain thanks to this exemption. The capital gain amount must be deposited in your designated super fund if you are under 55. If you are over 55, the capital gain is entirely tax-free for you.
You have the option to roll a capital gain into a new asset if you sell an active asset. The rollover amount is then deducted from the new asset's cost base.
Tax Planning Techniques for Businesses Selling Their Enterprises
The following CGT benefits are offered to companies operating under a company structure:
- If your company is sold as part of an overall share sale, you may be eligible for an initial CGT reduction of up to fifty percent. If it is sold as an asset, however, there is little chance that it will qualify for the initial 50% capital gains tax cut. You can read further about this below.
- You are totally exempt from CGT on the sale if you are 55 years of age or older, retiring, and you have continuously held your business for 15 years or more.
- Only 50% of the capital gain tax is due if your company is regarded as an "active" asset.
- If you're under 55 and retiring when you sell your business, you can transfer up to $500k of the capital gain tax-free into your retirement account.
- You can postpone the present capital gain into the upcoming fiscal year when selling the business and starting/acquiring a new one.
What It Means: Share Sales vs. Asset Sales
Companies might choose to either sell their firm as an asset or their stock.
- When shares are sold, the buyer effectively purchases the entire firm by purchasing shares in it. As a result, the assets of the firm might be retained by the seller, but the legal entity of the business now belongs to the new owner.
- A company's assets, such as stock, real estate, or land, are acquired through an asset sale. The seller is still the legitimate owner of the business, though.
While a share sale may be more cost-effective for a corporation, an asset sale may be simpler and more easy. This implies that any business liabilities are now the responsibility of the new owner.
The Benefits Of Ahead Planning
When it comes to getting the most out of the sale of your company, nothing can replace thorough planning. When you plan farther in advance, you'll be better able to make use of strategies that reduce the impact of CGT on your business.
It's possible that you'll want to get a head start on this planning as soon as your company gets off the ground. This affords you the opportunity to choose a structure that makes you eligible for CGT concessions, when and if those concessions are appropriate.
If you are certain from the beginning that your company will grow to the point where a corporate structure is required, you might want to think about putting your shares in a family trust. Because of this, it's possible that your company will qualify for the initial 50% CGT deduction.
If your organisation is already well-known in its industry, you should give major thought to your sales strategy. Consider lowering your prices in light of the risk that your sale rate will cause you to fall short of the $6 million nett asset minimum, so preventing you from receiving the initial 50% concession.
Tax Advice For Business Sales
Many tax-related concerns could come up when you sell your firm. Even while there isn't a secret formula to maximize your tax position for every business sale, there are a few important considerations that could end up saving you money if you take them into account throughout the sale discussions, according to Eddie Chung.
When selling a business, the following information may assist to clarify some frequent misconceptions and errors and make sure you get the greatest price for the asset you have worked so hard to develop:
Do Not Apportion The Sale Price Across Various Assets On The Contract
In order to improve your tax situation, you might maximize or minimize the values associated with specific assets (such as trading shares or depreciating assets), but doing so could hurt the buyer's tax situation.
The parties can assign independent values to the assets based on a reasonable distribution and apportionment of the overall transaction value across all of the sold assets by avoiding contractually assigning predefined prices to the assets. This gives each party the freedom to individually optimize their own tax circumstances.
Delay The Contract Date Where Possible If The Agreement To Sell Is Near The End Of The Financial Year
The CGT event linked with the sale of assets subject to capital gains tax (CGT), such as goodwill and real estate, typically crystallizes on the date of the contract rather than the settlement date.
Delaying the contract from, say, 30 June 2016 to 1 July 2016 will delay any CGT due on the sale for a period of 12 months.
Negotiate To Make A Separate ‘accrued Leave Transfer Payment’ To The Purchaser Where Possible
This is because you, the seller, will be able to deduct the payment from your taxes. In contrast, when the unpaid leave liabilities are taken into account when determining the business's final sale price, your CGT may be reduced.
The tax benefit of paying the unpaid leave employee entitlement and claiming a tax deduction is likely to be significantly greater than the tax benefit of lowering the sale price of the business by the liabilities assumed by the buyer given the potential application of the 50% CGT discount and/or other CGT concessions.
However, before the payment is considered an "accrued leave transfer payment," certain requirements must be met.
In accordance with Australian legislation, award, order, determination, or industrial agreement, for instance, the payment must be made to another company that has begun (or is about to begin) being obligated to make payment in relation to the leave liability.
Therefore, the payment may no longer qualify as an accrued leave transfer payment if you are selling your trading business to the purchaser and that entity will remain responsible for the payment of the leave debt in the future.
Think about whether there are any opportunities to transfer any carried-forward tax losses you have incurred throughout your ownership of the business to the buyer.
You gain negotiating power and may raise the sale price by doing this. However, keep in mind that the buyer's capacity to utilize such tax losses will rely on a number of variables.
For instance, in order to acquire tax losses, the purchaser must buy the trading entity that incurred the losses. Additionally, the purchaser must meet certain requirements related to the loss recoupment laws for the particular kind of entity in order for the losses to be made accessible to them.
It may also be possible for you to take advantage of additional benefits, such as the 50% CGT discount, by selling your stake in the entity (such as shares in a trading company) as opposed to your firm outright.
Let's say the buyer is hesitant to buy the company and take on the company's prior trading hazards. If so, you can think about providing contractual warranties covering a limited future time period to offer the buyer indemnities in the event that certain risks come to pass.
When tax breaks that would not otherwise be available more than offset the price reduction, lowering the purchase price can also be effective.
Don't forget to utilize any tax breaks that are available to you so that you can legally lower your tax obligation when selling your business
The 50% CGT discount, which allows you to cut the capital gain on the sale of a CGT asset in half, may be the most popular concession. To qualify, the business asset must have been owned by a person or a trust for at least a year prior to the sale.
Additionally, if your aggregated group net asset value is less than $6 million (excluding your primary residence and superannuation benefits) or your aggregated group turnover is less than $2 million, you may be eligible for the extremely powerful "small business CGT concessions," which have the potential to completely eliminate your CGT liability.
There are specific guidelines that apply to how you determine these sums and which entities are to be included in your group.
Applying for these concessions requires careful consideration because the criteria can be stringent and prescriptive. You must "check every box" to be eligible for the concessions. If you make a mistake, the Australian Tax Office might later contact you to reject your claim.
To be clear, the "look-through approach" allows you to structure a business sale so that you are paid by the buyer in instalments that are based on the company's future performance. This is known as a "earn-out arrangement," and those future payments may be eligible for any CGT discount or small business CGT concessions that were possibly claimed when the business was sold.
For instance, under the "supply of a going concern" GST-free approach, it is possible that the company sale will not incur GST even if you are the "provider" in the transaction if you sell all that the purchaser needs to continue operating your enterprise (or portion of an enterprise).
You must be sure that the manner you structure the sale will allow you to access the exemption since, once more, the devil is in the details (for example, if you sell the business and business premises to separate entities that belong to the purchaser).
It is usually prudent to include a "GST recovery clause" in the sale contract as a precautionary step to enable you to recoup any GST from the buyer in the event that the Tax Office later determines that you were ineligible to invoke the GST exemption for any reason.
Even while the selling of a firm might appear to be very simple, this is frequently not the case when it comes to the specifics. As a result, it is always advisable to consult your lawyer and accountant to help you navigate the transaction and make sure they collaborate to get the greatest outcome.
To guarantee that you properly minimize your tax burden and maximize the profit on all of your time, sweat, and tears invested in preparing the firm for sale, it is very important that all draft contracts and agreements be evaluated by your accountant from a tax viewpoint.
Tax Considerations for Business Sales
How much tax is paid (if any) on the sale of a firm can have a significant impact on how much money business owners receive. If the planning is done early enough, there are frequently decisions that may be made to lower or even eliminate the final tax burden.
Selling Business Or Company?
This is frequently the first question that is asked and it might be quite important. Since corporations are not exempt from the 50% capital gains tax (CGT) reduction, it is often preferable for individual owners to sell their shares in a company that is actively operating a business than for the corporation to sell its business and then disperse the proceeds.
Of course, not every buyer is willing to purchase the company, so that is a matter of negotiation. However, if sellers are aware of how much tax is at risk, they may be less willing to give up their position. If so, it may be possible to find a way to complete the transaction on the basis of a share sale that is acceptable to both parties.
CGT Concessions
For companies that match the prerequisites, the small business CGT concessions are quite beneficial since they allow the CGT on a business sale to be waived or significantly reduced.
While there may be tax savings when a firm uses the concessions to sell its business assets, they often offer bigger benefits under a share sale, and it's easier for the shareholders to obtain the funds. The concessions are applied after the CGT reduction.
Under specific grouping regulations involving connected firms and people, concessions are available to businesses with "aggregated yearly turnover" of less than $2 million (the SBE test) or total net assets of less than $6 million (the NAV test). The family residence, superannuation balances, and assets used for personal use are specifically excluded from the NAV test, which covers assets of controlling individuals (such as boats, cars and holiday homes).
For share sales, there are two extra requirements:
First, the shares must be sold by a "significant individual" (someone with a direct or indirect stake of at least 20% in the business being conducted), or if the shares are being sold by a company or trust, certain additional conditions must be met.
Second, the relevant company must pass the "active asset" test, which stipulates that for at least half of the ownership term, business assets must account for at least 80% of the gross asset values of the company (except if the business has been carried on for more than 15 years, the test need only be satisfied for 7.5 years in total).
Non-business assets will include passive investments, shareholder loans, and (in certain situations) sizable cash amounts that are not required for operating the firm for the purposes of this test.
The retirement concession is also available to persons under the age of 55, but they must pay the full value of the concession ($500,000 in this case) into a super fund, which is something that many people are unwilling to do because they require access to the complete selling profits.
Another option is to reinvest the $500k into another active asset, such as stock in a firm that is actively running a business, as long as the investor qualifies as a substantial individual with an interest of at least 20%, but once more, this option may not be appropriate in every circumstance.
The Tax System in General
Examining the operating company's amount of retained earnings and related franking credits is another important consideration. It is common for a share sale agreement to stipulate that any profits must be distributed as dividends to the current shareholders prior to settlement, so it is wise to plan dividend payments over several years rather than having to pay sizable dividends right before the sale, the majority of which may be subject to the highest marginal tax rate. There is a "top-up tax" of about 23% even after franking credits.
The running company's ownership structure is a relevant issue.
If one person owns all of the company's shares, they are also entitled to all dividend payments.
Shares owned by multiple entities will have any dividends divided among them, making it more likely that at least some of the payments will be subject to reduced marginal tax rates.
A separate class of shares with special dividend rights should be avoided, though, as this can make it much harder to qualify for small business CGT concessions when a sale occurs.
Having a family discretionary trust control all the shares, or numerous family trusts if more than one family is involved, is, in our opinion, the cleanest and most efficient strategy.
This gives you the most flexibility possible and makes it straightforward to meet the requirements for the small business CGT reductions because dividends can be paid up to the family trust(s) and then split among different family members each year as necessary.