Tax is one of the key factors that an owner should consider when preparing to sell their business. Careful tax planning and consultation with your corporate adviser can save you hundreds of thousands, and sometimes millions of dollars.
When it comes to selling a business, capital gains tax (CGT) is a complicated and nuanced issue, that requires expert navigation. Read on to learn more about the avenues you can take to minimise the tax you pay when you wish to sell.
Looking to sell your business? Nash Advisory offers expert advice on the best steps to take towards a successful result. including tips on how to reduce CGT.
What is capital gains tax?
When you sell an asset, you usually make a profit or a loss. This is the difference between what it cost you versus what you sold it for. Capital gains tax is the tax you pay when you sell a capital asset for a profit.
Common capital assets include:
- Real estate
- Shares in a company
There are several assets that are exempt from capital gains tax, including
- Your home (main residence)
- Your personal vehicle, most of the time
- Depreciating business assets like equipment
- Any asset acquired before 20 September, 1985
[feature_link]There are several methods to working out capital gains or loss. These can be found through the Australian Taxation Office's resources.[/feature_link]
How does capital gains tax affect the sale of my business?
A business owner can expect to pay between 12% to 30% on the sale of their business in income tax. This is a broad range, and illustrates why it is important to seek advice.
Nash Advisory is not a tax adviser. However, we work closely with firms that are specialists in this field. Often your local accountant or tax firm isn’t across all of the options and issues with regards to tax on the sale of a business. Get in touch with us for more information.[/content_aside]
Shares vs Assets
When an owner chooses to sell their businesses, they can either sell shares or sell assets. Different tax rates and applications apply for each, and an owner needs to be aware of these difference before proceeding.
- Selling shares — shareholders sell their shares onward to a new owner, who takes majority.
- Assets sales — companies sell off valuable assets to a new owner, like equipment, client lists, and trade marks.
The amount of tax that you can reduce or pay depends on the structure of your business, how long you've held assets for, and many other factors. To thoroughly understand your requirements when selling shares versus assets, get in touch with Nash Advisory.
Small business owners can potentially access additional tax concessions which can reduce the tax on a business sale. There are broadly four options that can apply for small business concessions, however each has a range of criteria which must apply.
These concessions include:
- 15-year exemption: If you have owned the asset for more than 15 years, you may be exempt from capital gain.
- 50% active asset reduction: This potentially allows you to reduce the gain of the sale of a business asset by half.
- Retirement exemption: This allows potential relief from CGT if you sell active assets, as opposed to passive assets.
- Rollover: You can defer capital gain for up to two years, or over two years if you replace or improve an existing asset.
Planning for a business sale
A good corporate adviser and tax adviser can also help an owner to access franking credit balances, and therefore maximise after-sale cash proceeds. In our experience, beginning to plan for tax on a sale should begin at least 6 months before a sale, and ideally 12 months.