Tax considerations – particularly Capital Gains Tax (CGT) – are very important for anyone considering changing their business structure, divesting or selling part or all of a business as a result of retirement, change of career, succession planning, etc.
In this situation it’s wise to seek your tax advisor’s assistance in looking at the options associated with a business sale.
JPABUSINESS: If I wish to sell my business on the open market, what should I consider from a Capital Gains Tax (CGT) perspective?
MICHAEL: The key thing to consider is:
- are you selling business assets, or
- are you selling an entity?
If you conduct a business out of an entity, such as a company, the tax implications of selling the company’s shares, as opposed to selling the business’s assets out of the company, are very, very different.
As a general rule of thumb, most purchasers would prefer to buy business assets as opposed to shares or an entity, because they take on less risk associated with the history of the entity.
From a tax perspective the outcomes can be vastly different.
If you sell business assets out of an entity you have to deal with extracting profits out of the entity, whereas if you sell shares in a company, there can be easier access to CGT concessions.
Here's an example:
As you can see, selling the assets out of the company can give a very different tax result compared to selling the shares in the company.
As we said earlier, most vendors want to sell shares, but most purchasers want to purchase business assets, so there is often a conflict there.
The moral is that it requires quite a bit of planning, which should be done prior to negotiations taking place.
JPABUSINESS: Often when we’re assisting clients to prepare their business for sale, a critical step is to consider the tax effect of a potential transaction on the likely net proceeds.
While tax matters don’t impact the market value of the business, prior advice can help optimise the outcome and shape the sales pitch process.
For advice on issues to consider when preparing your business for sale, contact the team at JPAbusiness on 02 6360 0360.
James Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.