Table of Contents
Capital Gains Tax on Selling a Business: What You Need to Know
With so many things to consider when selling a business, many people overlook capital tax gains (CGT). If you are strategic about getting in the business or getting out of it, you have the opportunity to make a profit while minimising the amount of CGT to pay.
If you sell a business for more than you purchased it for, any money made on top of your initial investment are capital gains. Utilising the tax concessions provided by the ATO, you can minimise the taxable profits from the sold business, and the amount of Capital Gains Tax you must pay.
Some of the more technical aspects of selling your business can be confusing. It’s always recommended you speak to an accountant – like the team at WealthVisory – for advice on selling your business.
To get you started, though, we’ve answered the top six questions we hear about CGT and selling a business.
Read on to learn the essentials!
Is a Business a Capital Asset?
A capital asset refers to anything owned that is or can be an investment. Like property, a business can also be considered a capital asset. In addition, certain business assets like machinery or equipment are also considered capital assets. It can be tangible or intangible (like goodwill or reputation).
If I Sell My Business, Is It a Capital Gain?
If you sell a business, it is a capital gain if you generate a profit from that sale. The amount of money you spend on setting up and maintaining your business is subtracted from your capital gains when capital gains tax is calculated.
Capital gains are the profits made from the sale of an asset. The more profit you make from selling a business, relative to how much you spent on it initially, the more you have to pay in Capital Gains Tax, or CGT. The amount of CGT you pay is affected by:
- Base or cost base, which refers to the amount you put into the business initially. It could be $0 if you started the business yourself; or much higher depending on how much you spent acquiring, holding, and disposing of the asset or business. Some factors that affect the cost base are the rate on investment properties, brokerage fees on purchase and sale, and the cost of advertising to sell the asset. However, any amount before a CGT sale isn’t considered part of the cost base.
- Sale price, put simply, is the value for which you sold your business.
- Business structure refers to whether you are a sole trader or your business is a partnership, a company, or a trust. Depending on how your business is registered, the tax responsibilities also differ.
- Tax concessions, which refer to the discount that will be given to you depending on your eligibility. The discount could rely on factors like how long you’ve had the business for or your age.
- Income in the financial year you sell your business.
To determine exactly how much business capital gains tax you’ll need to pay, you should always speak to your tax accountant.
What if I Make a Loss When Selling My Business?
If you make a loss when selling your business, this loss can be leveraged to reduce the amount of capital gains tax you pay in that financial year. A capital loss is when you sell a business for less than you initially purchased it for.
If your capital losses from selling your business at a deficit exceed your capital gains for the year, or if you make no capital gains in that financial year, the loss can be carried over into the next financial year and deducted from capital gains in future years. Under ATO policy, how long you carry your capital loss isn’t time-bound as long as you have the correct documentation.
Having detailed documentation of purchase history, money invested into the business and incoming and outgoing money from the business is essential to ensuring that you are legally able to claim capital losses on that business.
A business tax accountant can advise you on how a capital loss will impact your finances.
What CGT Concessions Apply If I Sell My Business?
If you are a small business owner, various tax concessions can help you lessen the CGT when selling a business as a whole.
To be eligible for these concessions, you must
- have less than $2 million turnover; or
- have less than $6 million in net assets.
The most common capital gains tax concessions in Australia are:
The First 50% CGT Reduction
The first 50% CGT reduction, also known as the General 50% CGT discount, is given to individuals, sole traders, and trusts (family or discretionary trusts) who have held their assets for over 12 months. One caveat under trusts is for Self Managed Superannuation Funds, as they’re only eligible for a 33% CGT discount.
For example, let’s assume you are a sole trader of a 13-month-old business. You sell it and produce a capital gain of $200,000. The first 50% CGT reduction applies to 50% of your gain or $100,000. Hence, only the $100,000 will be taxed.
You can sell a business as an asset sale or a share sale.
- Asset sale or asset deal is when a buyer purchases some aspect of the business, like equipment, land, or stock. However, you, as the seller, still own the legal entity of the company.
- Share sale or share transaction is when a buyer purchases company shares, encompassing the company itself and its legal entity. Share sales usually entail the buyer getting the debts and other liabilities of the business sold.
It’s important to note that the first 50% CGT reduction only applies to a share transaction, not an asset deal.
The 15-year exemption applies to owners 55 years old and above and are retiring or to those who are permanently incapacitated. The owner must also have owned the business continually for over 15 years. This 15-year exemption results in no assessable capital gain or $0 tax.
50% Active Asset Reduction
The 50% active asset reduction applies to a business that has been in operation for at least half the time it’s owned.
For example, you are the owner of a five-year-old business, which has been in operation for that entire five year period. When you sell it and receive a capital gain of $1,000,000, you apply the first 50% CGT reduction then get another 50% active asset reduction. The calculation would look something like this:
1,000,000 x 50% general CGT x 50% active asset reduction x tax rate
The retirement exemption applies to an active asset in which the owner is about to retire. It ignores up to $500,000 capital gain and only taxes anything above that. If you are over 55, you get $0 tax; if you are under 55, your capital gain must be deposited into your superannuation fund.
It’s a common misconception that there’s an age limit for Capital Gains Tax, or that you won’t need to pay CGT when selling your assets to retire. However, the exemption itself is more specific, and you’ll want to confirm with a financial planner whether CGT will apply to your situation.
Small Business Rollover Concession
The small business rollover concession or rollover relief is applicable when you buy a replacement asset or improve an existing asset. You can defer your capital gain, but only for up to two years.
Which Business Assets Are Capital Assets?
A capital asset refers to anything that can be an investment or something that earns revenue for the business. It includes, but isn’t limited to:
- manufacturing machinery or equipment
- office equipment
- real estates, like land and buildings
CGT only applies to assets that are acquired on or after 19 September 1985 (post-CGT assets). Therefore, capital losses can be deducted from the sale or disposal of those assets. You can visit the GST and the disposal of capital assets page on the ATO website to find out more.
Shares acquired before 19 September 1985 (pre-CGT shares) may also be subject to CGT. You may read more on Shares, units and similar investments on the ATO website.
Do I Pay CGT if a Liquidator Sells My Business Assets?
A liquidator will be treated as if the company or business owner sold the assets. Standard CGT rules apply. Any loss or gain is attributed to the company, not to the liquidator.
Regular CGT rules also apply to shareholders even when the company makes final or interim distributions or is deregistered under the Corporations Act 2001.
Liquidators must be registered, and cannot be an officer, employee or auditor of the company in question. A liquidator can be penalised or held liable if they are in breach of this.
What Else Can Affect CGT When Selling My Business?
Other factors to consider when selling your business are:
- Earnout arrangements, which refer to a contract that can be made in case financial goals are met by the asset or business sold. The buyer has to pay the seller additional amounts if the asset or business fares well. You can find out more about earnout arrangements and CGT on the ATO website
- Buy or sell agreements, which cover the transfer aspects of the sale and the funding arrangements.
- CGT cap election, especially if you’ve made contributions to your superannuation fund during the financial year.
- Rollover statement, which refers to documentation and information about the superannuation fund of the seller. This can ease the rollover process.
You can find the complete list of things that can affect CGT when selling your business from the ATO.
What Is a Financial Supply?
A financial supply is a sale that doesn’t have GST included in the price. You can create a financial supply when you:
- Buy or sell shares
- Give credit to a customer
- Loan or borrow money
- Create, assign or transfer interest in a superannuation fund
- Receive or provide credit prior to July 1st, 2012, under a hire purchase arrangement
- Australian currency, foreign currency and travellers cheques
What Is the Margin Scheme?
The margin scheme is a method of calculating the GST payable when you sell land or buildings as part of a business. To be eligible for the margin scheme:
- you must be registered for GST
- the sale of your must be a taxable supply; and
- you must not have paid GST when you purchased the property
It also requires a written agreement. Then, you can use the ATO’s Property Tool to determine your GST reporting outcome.
How Can I Tell if My Business Is a Going Concern?
A business is a Going Concern when it’s sold with everything needed for the new owner to the business as usual. Companies sold as a Going Concern are required to continue operating until the date of sale to ensure no loss of business or reputation during the period of ownership changeover.
Businesses sold as a Going Concern are not exempt from GST by default. However, they may become exempt under the conditions of:
- Payment being made for the sale of a business.
- The purchaser registering it for GST
- An agreement in writing dictating that the sale is of Going Concern
If the business you are selling is entirely ready to continue operating once the ownership of the business officially changes, then it is likely considered a Going Concern. However, it is always best to seek advice from a business accountant to set aside any concerns you may have.
Thinking About Selling Your Small Business?
Selling a business can be a complicated process on its own, with all the documentation needed to pass on to the new owners, and that’s not even considering the taxation rates for selling your business. To ensure you are selling your business at the best time, and aren’t paying an incorrect amount of tax, it’s essential to work with a reliable local accountant.
If you’re considering selling a business, the team at WealthVisory Accounting should be your first call. Our team of talented chartered accountants specialise in business and personal accounting, so we can help you understand the implications for your individual taxes as well.
With offices in Mandurah, Rockingham and Perth, we’re Perth and Peel’s business accounting & advisory experts. For more information on buying and selling a business, book your appointment with WealthVisory.
This article is provided as general information only and does not consider your specific situation, objectives or needs. WealthVisory makes no warranties about the ongoing completeness or accuracy of this information. It does not represent financial advice upon which any person may act. Implementation and suitability requires a detailed analysis of your specific circumstances.
Aaron is a Chartered Accountant with over 15 years experience in the accounting industry. Aaron has been able to provide advice around structuring, cashflow, tax compliance and working with clients to develop strategies.