With an increasing number of small business owners reaching retirement age and looking to sell their business, it is important to properly deal with all of the tax considerations to maximise the after-tax sale proceeds.
For example, one tax concession that business owners expect to be able to claim is the small business capital gains tax (CGT) concessions.
However this is an area that the ATO is always paying close attention to, so it’s important to take care to ensure that all of its requirements are met. Otherwise owners could receive a significant tax bill at the end of the sale.
There are six main questions that business owners should ask themselves to determine the CGT implications on the sale of a business.
1. Is it the company, or the business’s assets, being sold?
Selling the shares in a company, rather than the company selling its business assets, allows shareholders to claim the 50% CGT discount and can also help maximise the benefits of the small business CGT concessions.
2. Does the business qualify for the CGT concessions?
To qualify for the concessions, the business must have either net assets of less than $6 million or combined turnover of less than $2 million (after grouping related entities and individuals).
Generally, individual shareholders in a business must own at least 20% of the company. In addition, the assets sold must be used in a business (the ‘active asset’ test).
3. Have the grouping rules been applied correctly?
The starting point for grouping is always the individual or entity making the capital gain. Commonly controlled entities (where 40% ownership indicates control) must be included, although the rules for testing control of trusts are fairly complex.
Spouses are not automatically grouped, but can be in certain cases. Some assets are excluded from the $6 million net asset limit, notably the family home and any balances held in super funds.
4. If shares, how are they being sold?
There are some common traps when selling shares.
For instance, discretionary dividend share classes usually make the 20% ownership requirement ineligible, although in some cases this can be managed with careful planning, preferably well ahead of any potential sale.
For more complex structures, business owners need to trace through to the individuals who ultimately control the various companies and other entities.
5. Are the business premises being sold separately?
The small business CGT concessions can be used separately for each sale and sometimes this can help maximise the sale proceeds.
A common strategy is to keep the premises for a certain period and rent it to the new business owners, although there are time limits under the active asset test.
6. What will the money be used for?
For those aged under 55, the small business CGT concessions can usually be maximised by putting some of the sale proceeds into a super fund, but business owners should carefully consider whether this suits their own circumstances.
It may also be helpful to reinvest some of the proceeds into a replacement business or business structure, but there are strict rules on how to do this. It becomes much easier, if you reach 55 before or around the time of the business sale, to just to take the money.
