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When it comes to a business sale, as a hard-working small business owner, you’ve spent years building your livelihood. Now, for whatever reason, you’ve decided the time has come to sell or close down your enterprise. To assist you, the Australian Tax Office (ATO) provides detailed guidance on important legal and taxation matters you will need to address. Here, we have clarified some of the more confusing requirements.
Goods and Services Tax (GST)
If you are registered for GST, disposing of capital assets is considered a taxable sale, and you are required to account for GST. If your business sale includes selling real property, the margin scheme calculates the GST as being 1/11th of the difference between the sale price and the purchase price or approved valuation. However, a business sale as a going concern is generally exempt from GST. The ATO recommends obtaining a private ruling relating to your particular circumstances to ensure compliance.
Capital Gains Tax (CGT)
The your business sale includes the sale of assets may incur CGT if you sell them for more than their cost base. If you satisfy the definition of ‘small business’ for CGT purposes (currently net assets of $6 million or less), you may be eligible for several concessions. These include CGT exemption on assets owned continuously for at least 15 years, a 50% capital gain reduction on active assets, or total relief if you are retiring. Additionally, you may defer capital gains for two years or longer if you acquire a replacement asset.
Earnouts and Event K6
If a price can’t be agreed upon at sale time, an ‘earnout agreement’ allows payment of an initial lump sum with subsequent payments based on the business’s performance after the sale. These payments are considered received in the year the sale occurred, often requiring the amendment of prior year tax returns. If you own pre-CGT shares and the market value of your company’s post-CGT assets are at least 75% of the net value of the company, the ATO may deem your shares to be post-CGT assets.
Buy/Sell Agreement and Cap Election
A buy/sell agreement ensures that surviving business partners will buy out your interest in the business should you die, become disabled, or retire. If the payout from a life insurance policy is used, the proceeds will be exempt from CGT. Should you satisfy the ‘small business’ net asset threshold and the 15-year ownership CGT exemption, you may be eligible to make a non-concessional contribution of your business sale proceeds into superannuation without affecting your non-concessional cap. A lifetime limit of $500,000 applies.
Rollover Statement and Division 7A
You must provide certain information to a super fund when rolling over an eligible termination payment (ETP) consisting of a CGT-exempt component. If your business forgives all or part of a debt owed by you as a shareholder or shareholder’s associate, the debt may be treated as dividends under Division 7A. You can seek the Tax Commissioner’s discretion in this area.
Demergers and Winding Up a Company
If selling your company as a number of separate entities, your demerger may have CGT consequences. If your company pays a distribution to shareholders of money or property derived from income and not paid-up share capital, that distribution may be deemed to be dividends. CGT provisions can be triggered when a company makes a final or interim distribution where the distribution is not deemed to be dividends. If a liquidator has been appointed, they have an obligation to collect any debts owed to the ATO.
Finalising Employee or Independent Contractor Obligations
If your business sale means saying goodbye to employees, including independent contractors, you will need to finalise matters relating to fringe benefits tax (FBT), pay-as-you-go (PAYG) withholding, superannuation, and eligible termination payments for those employees. This can be a complicated process, so you should always seek professional advice regarding the legal and taxation matters involved. Above all, retain all related documentation and records to ensure a smooth transition during your business sale. relating to FBT, PAYG, superannuation and eligible termination payments for those employees.
This can be a complicated process when going through a business sale so you should always seek professional advice regarding the legal and taxation matters involved and above all, retain all related documentation and records.
For more information on leading up to the valuation and sale of your business see our M&A and Valuations team.
