Planning the sale of your business can be complicated. Here’s what you need to know about the tax implications of selling a business in Australia.
Selling a business is complicated. One of the most common obstacles faced by business owners when selling a business in Australia is tax — determining tax obligations and creating an effective tax strategy for selling a business can be complicated.
There are a number of important factors that must be considered when selling a business. Marginal tax rates for business sales can reach as high as 49 percent, so it’s critical to understand the tax implications associated with selling a business.
Many business owners are unaware of the various concessions that are available when selling a business, or are unfamiliar with some of the most common obstacles and issues that arise during a sale. If you’re currently selling or are considering selling your business, this article will break down what you need to know about business sale tax in Australia.
Understanding Tax for Business Sales
Business owners seeking to sell their business are primarily focused on ensuring that they receive a fair value for their hard work. A successful business is the product of many years of labour — all business owners want to make sure they’re getting what their business is worth.
The tax obligations you may incur when selling your business can represent a significant portion of the sale value. The complex nature of business sale tax considerations means it’s best to engage the services of a professional tax advisor like Fullstack before the transaction to best optimise your tax situation.
If you’re interested in the general tax implications of selling your business, read on.
How are Tax Rates Calculated When Selling Your Business?
Selling a business is generally considered as part of the income of a business for tax purposes. In most cases, the sale of a business is taxed under the tax rate specific to the structure of your business. The two most commonly-sold business structures in Australia are sole traders and trusts or company structures.
Sole Traders and Trusts
A business owner selling a business structured as either a sole trader or trust typically generates a significant amount of capital upon sale. Depending on the sale price of the business sold, the sale is typically subject to a tax rate from high individual tax brackets.
These tax rates typically range between:
|Taxable Income||Tax Rate|
|$90,001 to $180,000||$20,797 plus 37% on every dollar over $90,000 in addition to a 2% Medicare levy|
|$180,001 and above||$54.097 plus 45% on every dollar over $180,000 in addition to a 2% Medicare levy|
Company structures & tax on sale
Company sale tax rates calculated in a different manner than sole traders or trusts. The sale tax of company structures in Australia is typically taxed at a nominal tax rate between 25%-30% owning to the base entity rules.
Capital Gains Tax and Selling a Business
The sale of a business in Australia is considered as the sale of an asset regardless of the structure of the business. This means that the sale is subject to capital gains tax (CGT), as the seller generates a capital gain.
In simple terms, capital gains refers to the profit generated on the sale of an asset such as a business.
A business owner that sells a business for more than the initial cost of establishing the business will generate a capital gain on the sale of the business. The sale therefore triggers a capital gain event, incurring capital gains tax (CGT).
The amount of capital gains tax a business sale is subject to depends on a number of different factors, which include:
- The initial cost of establishing the business, referred to as the cost base. A business owner that purchased a business will refer to the purchase price as the cost base. A business owner that created a business themselves may have a cost base as low as $0
- The sale price of the business
- The tax structure of the business being sold. Some business structures are able to better manage tax obligations than others
- Any tax concessions that the business for sale is eligible for. There are many different tax concessions that can significantly reduce the overall tax obligation for a business sale, which are outlined below
- The total amount of income a business owner earns in the financial year in which the business is sold
Business A was launched by the business owner. The business owner has curated their own client base and now generates an annual salary of $200,000. The business owner is taxed personally at the nominal tax rate of 47 percent.
The business owner decides to sell business A for $500,000. Business A was not purchased by the initial owner, and therefore has a cost base of $0.
The business owner has generated a $500,000 capital gain on the sale of business A.
The total capital gain is calculated as part of the business owner’s income. Therefore, the capital generated from the sale of business A is taxed at the nominal rate of 47 percent, potentially adding $235,000 to the business owner’s taxable income.
The significant tax obligations incurred when selling a business in the manner of the example above mean it’s critically important to follow a concrete tax strategy when selling a business.
Business Sale Tax Minimization Strategies
There are a number of different capital gains tax concessions that, when used correctly, can significantly reduce the total amount of tax that must be paid on the sale of the business. In specific scenarios, these concessions can potentially reduce total tax obligations on the sale of a business to $0.
Small businesses benefit from a variety of tax concessions that can help minimize overall capital gains tax obligations. In order to qualify as a small business, a business must:
- Have an annual turnover of less than $2 million, or
- Hold net assets less than $6 million
A business that meets the criteria might be able to access the following capital gains tax concessions under the SBCGT regime.
50 percent Capital Gains Tax Reduction
Sole traders, individuals, and trusts that have owned their business for over 12 months may be eligible for a 50 percent reduction on the total capital gains tax applied to the sale of their business.
50 Percent Active Asset Capital Gains Tax Reduction
Active assets are defined as assets that have remained active and operational for a minimum of half the time the business owner has owned them. In most cases, businesses are considered active assets. The sale of an active asset is typically eligible for a 50 percent capital gains tax discount on the sale.
15-year Capital Gains Tax Exemption
Business owners over the age of 55 that are retiring might be eligible to completely disregard the capital gains tax applied to the sale of their business if they have owned the business for more than 15 years.
The retirement exemption allows business owners to ignore up to $500,000 of the capital gains tax incurred when selling a business. Business owners under 55 must deposit the capital gain amount into a nominated super fund in order to be eligible for the retirement exemption, while business owners over the age of 55 receive the capital gain tax-free.
Small Business Rollover Capital Gains Tax Concession
Small business owners selling an active asset have the option to roll the capital gain generated through a business sale over into a replacement asset. This concession can reduce the cost base of the new asset by the rollover amount. Business owners have up to two years to find a replacement.
Business Sale Tax Minimization Strategies for Companies
Businesses that operate under a company structure are able to access a variety of concessions that differ slightly from the concessions available to small businesses.
- A company sold as part of a share sale is eligible for the 50 percent capital gains tax reduction outlined above. It’s important to note that a company sold as part of an asset sale is not eligible for the 50 percent capital gains tax reduction.
- Business owners that have owned a company structured business for over 15 years and are retiring are able to access a complete exemption from capital gains tax on the sale of the business.
- A company considered as an active asset will, in most cases, be eligible for a 50 percent discount on capital gains tax incurred by the sale of the business.
- Similarly to the sale of a small business, company structure businesses are eligible for a retirement exemption that allows business owners to ignore up to $500,000 of the capital gains tax incurred from the sale as outlined above.
- Many founders wish to commence another business after an exit, and can use the sale proceeds as share capital for a new wholly owned business and use the replacement asset CGT rollover.
Asset Sale Versus Share Sale
There are two primary methods used to sell a business — asset sales and share sales.
- Asset sale involves the sale of the assets held by a business. These assets can include property, land, equipment or stock. In an asset sale the seller still retains ownership over the legal entity of the company. The most common dilemma for founders in an asset sale is that applying the Small Business CGT discount concessions doesn’t reduce the net tax payable by the founders.
- Share sale means the shares of the company are sold to the buyer, which gives them ownership over the company. Share sales allow the seller to sell the legal entity of the company often including associated debts. Share sales are usually less favoured by purchasers for this reason.
Determining whether an asset sale or a share sale is more tax efficient can be complex — conflicting tax & commercial implications may occur when choosing one method over another. The sales process must be carefully planned in order to achieve an optimal tax result and maximize net gains.
Planning Your Business Sale
Advanced planning is critical to the success of selling a business. The further ahead a business owner plans when selling a business, the better prepared they will be when taking advantage of the various capital gains tax concessions and minimization strategies available to them.
In most cases, planning for the sale of a business should start when the business is first established. This allows business owners to select a structure that provides them with the best possible capital gains tax concessions.
A business owner that is aware from the start that their business will scale and grow may view a company structure as the most tax-effective structure. Company structured businesses, in many cases, are optimally managed through shares held in a family trust. This may qualify the company for a 50 percent capital gains tax concession.
A business owner that is considering the sale of an established business must take the time to carefully plan their sales strategy and consider the potential tax implications. The sale rate of a business can, in many cases, cause the assets of a business to exceed the $6 million limit for qualification as a small business and therefore disqualify them from the 50 percent capital gains tax discount.
Forward planning is the most important element of any business sale tax strategy. It’s critical that business owners enter the sales process with precise planning, carefully considering the implications of business structure.
The various capital gains tax concessions available to business owners selling their businesses can rapidly become confusing. If you’re considering selling your business, it’s best to engage the services of an expert in order to ensure you’re following an effective tax strategy.
It’s critical to get the best support and guidance possible when selling your business. If you’re currently considering selling your business, reach out to Fullstack for comprehensive guidance today.