Quick Guide: Sell Your Business High and Save on CGT

Selling your business? Find out how to maximise its market value and while saving big on CGT.

Whether you are selling your business because you have to, or because you are planning a well-earned retirement, it pays to step through the process carefully.
In particular, if the sale isn’t handled correctly, you could find yourself receiving a hefty tax bill, as selling a business triggers capital gains tax (CGT).

Don’t rush it!

Although you may be keen to sell as quickly as possible, it’s important not to take some time because there is lots of work to do beforehand.

You will need to be clear about exactly what is being sold; whether assistance will be provided after the sale; how customers, employees and suppliers are to be notified; and whether existing leases and hire purchase arrangements will be transferred.

Decide whether you want a clean outright sale, or are prepared to accept an earnout arrangement or buy-sell agreement.

Most potential buyers will want to an independent valuation, so you need to have your business documents organised and updated.

If you operate your business as a franchise, check your franchise agreement for any special clauses relating to a sale. Some contracts restrict who you can sell to and include a process you need to follow.

Tax considerations

Although tax is often the last thing on your mind when selling, it shouldn’t be. It can have a big impact on how much of the sales price you get to keep.

Careful planning is essential because it can have a significant impact on your final tax bill whether you decide to sell shares in the company carrying on the business, or sell the company entity and distribute the proceeds back to shareholders.

When the company sells the business and makes a distribution, the 50 per cent general CGT discount does not apply, as companies are ineligible for this concession.

Capital gains tax (CGT) is the biggest tax issue to consider when selling, as your capital gain is calculated on the sale price of the asset minus its cost base.

CGT applies to company shares and goodwill, but does not apply to trading stock and depreciating assets used solely for taxable purposes, like business equipment.

Taking advantage of CGT concessions

CGT can be expensive when selling business assets, but small business owners are able to access several valuable concessions. These are in addition to the normal 50 per cent CGT discount applying when an asset is owned for more than 12 months.

Applying the four small business CGT concessions can eliminate or substantially reduce the CGT payable on a business sale if the annual turnover is under $2 million.

Before you can apply any of the small business concessions, however, your business must meet the basic eligibility conditions.

As the rules for these eligibility conditions are complex, speak to us for more information before deciding to take advantage of these concessions.

Increasing the saleability

Part of your pre-sale planning process should also focus on ways to improve your business’s appeal to potential buyers.

Establishing a detailed succession plan can make the process much smoother. The Department of Industry offers an online template you can use to develop your plan.i

Working through this process can help ensure your business isn’t dependent on your profile or name to be viable in the long-term, making it more attractive to buyers.

Spring cleaning your business

Other important tasks include updating your business’s accounts and business records and generally tidying up the operation so it presents well to potential buyers.

Most potential buyers will require three to five years of financial statements and other business records so they can value your business. They will also want to review the business’s income tax returns and details of physical and other assets (such as goodwill and intellectual property).

Information about your customers, competitors, sales information, debtors and creditors, insurance, inventory and marketing activities also needs to be available.

As part of your preparations, you should also review your obligations in terms of employee and contractor entitlements such as tax, superannuation contributions and long-service.

Get good advice

Key to ensuring a successful exit from your business is getting professional advice early in the process.

And don’t forget that you will need to keep all records relating to sales and purchases, employee payments and payments to other businesses for five years after the sale.

If you need help preparing your business for a future sale or want to know more about the implications of disposing of business assets, call our office today.

Applying the small business CGT concessions
Kendra is a small business operator who sells an active asset she has owned for more than 12 months. She makes a capital gain of $20,000 on the sale and also has a separate capital loss of $4,000.

Kendra meets all the conditions for the small business 50 per cent active asset reduction and the CGT discount. She calculates her net capital gain as follows:

$20,000 (capital gain) − $4,000 (capital loss) = $16,000 (net capital gain)
× 50% (applying the CGT discount) = $8,000 (net capital gain)
× 50% (applying the small business active asset reduction)
= $4,000 (reduced capital gain)

Kendra may be able to further reduce her $4,000 (already reduced) capital gain by using the small business retirement exemption and small business roll-over if she meets the conditions for those concessions.

If eligible, she can keep applying the other small business CGT concessions to reduce her capital gain to zero.

Some of these concessions can also be used to contribute amounts into her super fund without affecting her non-concessional contributions limits.

Source: ATO

i https://business.gov.au/-/media/business-information/templates-and-tools/succession-plan-template.docx

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.