In Short
- Selling a business has significant tax implications, including possible capital gains tax (CGT) liabilities.
- Various concessions and exemptions may apply to reduce tax payable on the sale.
- Engaging with tax professionals can help navigate complex tax rules and optimise the transaction outcome.
Tips for Businesses
Before selling your business, consult with a tax professional to understand potential tax liabilities and possibly access available concessions or exemptions. Proper tax planning can significantly impact the profitability of your sale and ensure compliance with tax laws, potentially maximising your financial return.
Selling your business can be an exciting and stressful experience. In the chaos of the transaction, it is easy to forget about the potential tax implications. Tax consequences are an unfortunate reality during the sale of a business. It is essential to consider these carefully and get advice to structure the transaction in the most tax-efficient way. This article will consider some key tax components when selling a business. This article is not tax advice. It is best to obtain your own accounting and tax advice for your business and personal circumstances.
When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.
This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.
Goods and Services Tax Implications
Goods and services tax (GST) is a 10% tax added to the sale of most goods and services in Australia. However, in the context of a business sale, the transaction can be GST-free, provided the parties meet certain conditions. The main question is whether the sale is of a ‘going concern’, which involves considering whether:
- the sale includes everything necessary for the continued operation of the business; and
- you carry on the business until the day of sale.
Generally, a sale of going concern is GST-free if:
- the sale is for payment;
- both parties are registered for GST; and
- both parties have agreed in writing that the sale is of a going concern.
If the sale is not of a going concern, GST may be payable in addition to the purchase price.
Capital Gains Tax (CGT) Implications
Selling a business is a ‘CGT event’, meaning that CGT may be payable if you have made a ‘capital gain’ on the sale. Generally, there will be a capital gain if the capital proceeds you receive for the sale of the assets are more than the assets’ cost base.
An asset’s cost base is the amount the asset was acquired for and the costs associated with maintaining it. If you have not made a capital gain on the sale (for example, if you sell the business for less than the cost base of the assets), CGT will not usually be payable as there has been a capital loss.
The Australian Taxation Office (ATO) has implemented several CGT concessions for selling small business assets. These concessions can reduce the amount of CGT payable if you meet the eligibility criteria.
You may also be able to offset the CGT payable on the sale of your business with tax losses you have incurred in previous financial years.
Further, you can also discount the capital gain by 50% (before the above concessions) if you are an individual or a trust and have held the asset for over 12 months.
Continue reading this article below the formIncome Tax Implications
Broadly there are five steps in calculating your net capital gain in a financial year. Start by adding up all your capital gains for that year, and then undertake the following steps.
- Reduce those capital gains by any capital losses you made during the same financial year.
- Reduce the capital gains again by any previously unapplied net capital losses from earlier financial years.
- Reduce the amount calculated in step 2 by the discount percentage if you are entitled to do so. Generally, an individual, trust and complying superannuation fund that has held the relevant capital asset for 12 months or more is eligible for this discount percentage, being 50% for individuals and trusts and 33 1/3% for complying superannuation funds.
- If any of your capital gains qualify for the small business CGT concessions, apply those concessions in accordance with the rules of those concessions.
- Add up the amount of capital gains (if any) remaining after step 4. This is your net capital gain for the financial year.
The amount of your net capital gains will be added to your assessable income for the income year. This refers to the amount of income tax payable on the sale of your business will depend on what type of business structure you use to run your business. The following table summarises the general position for each business structure upon the sale of a business.
Income Tax for Businesses Upon Sale
The following table summarises the general position for each business structure upon the sale of a business.
| Business Structure | Income Tax Treatment |
| Sole trader | Their net capital gains (including the proceeds from the business) sale will be added to the sole trader’s personal assessable income and taxed at their individual marginal rate. |
| Partnership | Each partner in the partnership will be taxed on the capital gain from the business sale proportionately to their interest in the partnership at their individual marginal rate. |
| Company | The company will add any net capital gains, including from the business sale, into its assessable income and be taxed at its company tax rate. At the time of writing, the company tax rate is 25% for companies with an annual aggregated turnover of under $50 million and 30% for all other companies. |
| Trust | A trustee of a trust is able to specifically distribute capital gains (including from a business sale) to a beneficiary under the trust. Each person or entity that the trustee distributes this gain to will be entitled to any CGT discounts or concessions the trust would have been eligible for if it retained the capital gain, and after applying the same method described above to calculate its net capital gain for the financial year, would be taxed at their individual marginal rate or company rate (if they are a company) on this amount. If the trustee fails to distribute all of its income (which includes capital gains) before the end of the financial year, the trust will be subject to the highest marginal tax rate, currently 47%. |
Key Takeaways
It is important to consider the tax consequences during the business sale process. Broadly speaking, the taxes most applicable to a business sale are GST, CGT and income tax. However, there may be other taxes to consider depending on the circumstances of your business sale. Finally, it is best practice to get proper advice on structuring the transaction to ensure your sale proceeds in the most tax-efficient way.
If you need help understanding your tax implications when selling a business, our experienced taxation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
The most relevant taxes when selling a business are GST, CGT and income tax. However, depending on the circumstances, other taxes (such as land tax if the sale involves real property) might be relevant. You should also consider whether selling the business is more tax-effective than selling the shares in the company.
Yes. Generally, if the business sale is of a going concern, this will make the sale GST-free. Certain CGT concessions are available for the sale of a small business, which can reduce or disregard CGT entirely.
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