Keep the ATO happy but take advantage of generous concessions by thinking ahead.
Hanging on to as much of the proceeds as possible when you sell your business can be tricky. The ATO expects you to share your good fortune with them and there are many traps for the unwary.
Fortunately, there are legitimate ways to minimise, defer or even eliminate your tax bill. The amount you save depends on your age, business structure, length of ownership and much more.
The rules are complex, confusing, and constantly changing. But with some careful planning, you can save enough money to make the difference between achieving your dream lifestyle – or not.
Review your business structure
As discussed in Part 3, it is smart to target synergistic buyers. To attract them and to minimise tax, you may have to reconsider your business structure and sale strategy.
A common dilemma is whether to offer an asset sale (sell the actual assets) or a share sale (sell shares in the company or units in the trust holding the assets). Asset sales are favoured by purchasers as they are less risky, but legislative changes have made share sales more common due to seller tax advantages.
Get smart about CGT
When you sell your business, CGT applies to the gain – the difference between the capital proceeds (sale price for the business) and the CGT cost base (what you paid for the business and the associated costs of acquisition).
The after tax proceeds represent the culmination of years of hard work, so minimising CGT should be a priority.
Structure impacts your tax minimisation options. A 50% CGT discount applies when assets (including shares) have been held for more than a year if they are owned by an individual, partnership or trust. This concession is not available to a company selling assets.
There are many misconceptions around CGT. Did you know it may apply:
- When you exchange shares in your business for shares in another company, even though no cash changes hands?
- If you sell shares in a business that was set up before CGT was introduced in 1985?
- When you sign the contract of sale, not when the sale is settled?
- To intangible assets such as goodwill and licences?
Severe financial penalties could be added to the original amount due if the ATO decides you have tried to avoid CGT – ignorance is no defence. To avoid a nasty shock, keep relevant documents for at least five years and seek professional advice.
Small business concessions
If your business has net assets of no more than $6 million and/or a maximum aggregated annual turnover of $2 million, you could access any or all of the following concessions where applicable. Be careful when assessing the $6 million threshold as it can include assets of other entities.
Small business reduction – 50% discount: Where the assets are actively used to operate the business. Shares can also be active assets.
Retirement concession – reduce your CGT by up to $500,000: If you are aged under 55, this applies if the proceeds have been contributed to your superannuation fund. If you are aged 55 or over, there is no need to contribute the proceeds to superannuation as you can opt for them to be CGT exempt up to the lifetime limit of $500,000.
Rollover concession – CGT deferred: By investing the proceeds into a new business, you can defer CGT payment until that business is sold.
15-year exemption – completely tax free: Applies when the assets have been held continuously for 15 years or more.
In conjunction with the 50% CGT discount, these concessions can partially or completely reduce your CGT liability if the sale is structured and timed correctly and meets the ATO’s stringent tests and rules.
Get your records in order
To avoid delays, your financial records must be complete and high quality. Otherwise the purchaser may force the price down or decide your business is too risky to buy.
ATO payment details, records of tax advice, company tax returns – they all prove to the buyer that your business has met its tax obligations and made robust decisions about tax strategies.
The more complex your business, the more diligent you must be. If you acquired another business, is the paperwork in order? If your business is part of a consolidated group, is there a valid tax sharing agreement that protects the purchaser against hidden liabilities?
Selling your business is a tax minefield. To protect your future: keep iron-clad records; optimise the sale structure; and seek expert advice well before the sale.
Now you know about minimising tax, what about maximising value? Learn more in Part 5.
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The contents of this article are generic in nature and do not represent advice that can be relied upon. You should seek professional advice based on your own personal circumstances. The author and any other parties involved in the preparation or distribution of this article expressly disclaim any form of liability to any person in respect of this article and any consequences arising from its use by any person in reliance in whole or any part of the contents of this article.
About the Author
Alan Max is Director – Corporate Finance, Moore Stephens (www.moorestephens.com.au), accountants and advisors who provide personalised and commercially astute accounting, tax and business advisory services. Drawing on over 20 years’ experience, Alan advises SMEs and smaller listed companies on exit planning, execution and valuation considerations. He can be contacted on (02) 8236 7700 or firstname.lastname@example.org