With the increasing number of small business owners reaching retirement age and looking to sell their business, owners should ensure they properly deal with tax considerations or they may end up with a great deal less than they expected, says Mr Peter Bembrick, tax partner at accountants and advisers HLB Mann Judd Sydney.
“For example, one tax concession that business owners expect to be able to claim is the small business capital gains tax (CGT) concessions.
“However, it is an area that the ATO is paying close attention to at the moment, so it’s important to take care to ensure that all of its requirements are met; otherwise owners could receive a significant tax bill at the end of the sale.”
Mr Bembrick said that there are six main questions that business owners should ask themselves to determine the CGT implications on the sale of the business.
1. Is it the company, or the business’s assets, that are being sold?
Mr Bembrick says that selling the shares in a company, rather than the company selling its business assets, allows shareholders to claim the 50 percent CGT discount.
“Selling shares can also help maximise the benefits of the small business CGT concessions, and possibly even result in the sale of a business being tax-free,” he said.
2. Does the business meet the basic conditions for claiming the small business CGT concessions?
To qualify for the concessions, the business must have either net assets of less than $6 million or combined turnover of less than $2 million (after grouping related entities and individuals).
“Generally, individual shareholders in a business must own at least 20 percent of the company. In addition, the assets sold must be used in a business (the ‘active asset’ test),” Mr Bembrick says.
3. Have the small business grouping rules been applied correctly?
“The starting point for grouping is always the individual or entity making the capital gain. Commonly controlled entities (where 40 percent ownership indicates control) must be included, although the rules for testing control of trusts are fairly complex.
“Spouses are not automatically grouped, but can be in certain cases. Some assets are excluded from the $6 million net asset limit, notably the family home and any balances held in super funds,” says Mr Bembrick.
[Next: How are the shares being sold?]
4. How are shares being sold?
Mr Bembrick warns that there are some common traps when selling shares.
“For instance, discretionary dividend share classes usually make the 20 percent ownership requirement ineligible, although in some cases this can be managed with careful planning, preferably well ahead of any potential sale.
“Non-business assets, including loan account balances and excessive cash reserves, can prevent the company’s shares from being ‘active assets’,” he said.
For more complex structures, business owners need to trace through to the individuals who ultimately control the various companies and other entities.
5. Are the business premises being sold separately to the actual business?
Mr Bembrick says that the small business CGT concessions can be used separately for each sale and sometimes this can help maximise the sale proceeds.
“Alternatively, it may be necessary because each are owned by different group entities.
“A common strategy is to keep the premises for a certain period and rent them to the new business owners. It’s possible to do this and still claim the concessions on selling the premises, but there is a limit to how long this can be done, depending on how long they were owned before the business sale,” he said.
6. What will the money be used for?
For those aged under 55, the small business CGT concessions can usually be maximised by putting some of the sale proceeds into a super fund, but business owners should carefully consider whether this suits their own circumstances.
“It may also be helpful to reinvest some of the proceeds into a replacement business or business structure, but there are strict rules on how to do this. It becomes much easier, if you reach 55 before or around the time of the business sale, to just to take the money and run!” says Mr Bembrick.
