How to sell your busi­ness, tax effectively

Too often busi­ness own­ers fail to take advan­tage of the gen­er­ous cap­i­tal gains tax (CGT) con­ces­sions avail­able when sell­ing a busi­ness. It takes hard work and ded­i­ca­tion to build and man­age a suc­cess­ful busi­ness, but all that effort could amount to very lit­tle if you end up being hit with high CGT on the sale proceeds.

There are four CGT small busi­ness con­ces­sions avail­able under Divi­sion 152 of the Income Tax Assess­ment Act 1997 (Cth), each poten­tial­ly pro­vid­ing you with siz­able tax sav­ings on the sale of your busi­ness. If you are cur­rent­ly in the process of sell­ing your busi­ness or think­ing about doing so in the not too dis­tant future, it is impor­tant to keep the avail­able con­ces­sions in mind and struc­tur­ing the sale in a way that will allow you to take full advan­tage of the small busi­ness concessions.

Eli­gi­bil­i­ty Criteria

Before you can reap the ben­e­fits of the avail­able con­ces­sions, you must be able to sat­is­fy the basic con­di­tions for relief. 

The first require­ment is that a CGT event must occur in rela­tion to your CGT asset. These terms are defined under the tax law and many dif­fer­ent sit­u­a­tions may qual­i­fy, but for our pur­pos­es let’s take the most basic – the sale of a busi­ness you own.

Assum­ing that is the case, you must then either:

1. be a small busi­ness enti­ty for the rel­e­vant income year;

2. be a part­ner in a part­ner­ship (that is a small busi­ness enti­ty) for the rel­e­vant income year, with the CGT asset being an inter­est in an asset of the part­ner­ship; or

3. sat­is­fy the max­i­mum net asset val­ue test.

Small busi­ness enti­ty and part­ner­ship interest
These con­di­tions are rel­a­tive­ly straight­for­ward. Essen­tial­ly, if you are car­ry­ing on a busi­ness dur­ing the cur­rent income year and either the aggre­gat­ed turnover for the pre­vi­ous year is less than $2 mil­lion or the aggra­vat­ed turnover for the cur­rent income year is like­ly to be less than $2 mil­lion, then you are con­sid­ered a small busi­ness entity. 

If a part­ner­ship meets this small busi­ness enti­ty def­i­n­i­tion, as a part­ner in the part­ner­ship you will have sat­is­fied this eli­gi­bil­i­ty condition.

Max­i­mum net asset val­ue test
The max­i­mum net val­ue of all CGT assets that belong to you, any enti­ties con­nect­ed with you and any affil­i­ates or enti­ties con­nect­ed with your affil­i­ates must not exceed $6 mil­lion just before the rel­e­vant CGT event for which you are try­ing to access a CGT concession. 

This test can be some­what com­pli­cat­ed to apply in prac­tice giv­en the need to work out pre­cise­ly what enti­ties are con­sid­ered ​‘con­nect­ed with’ you and/​or your affil­i­ates. The direct and indi­rect con­trol tests are rel­e­vant con­sid­er­a­tions, but for our pur­pos­es let’s assume you’ve done all the cal­cu­la­tions and you fall under the $6 mil­lion threshold.

Tim­ing is crit­i­cal – if the val­ue of your busi­ness and assets is grow­ing and you are approach­ing this thresh­old, you may need to act fast if you wish to take full advan­tage of one or more of the CGT small busi­ness concessions.

Con­ces­sions

Hav­ing sat­is­fied one of the above eli­gi­bil­i­ty con­di­tions, you are then able to access CGT relief under one or more of the fol­low­ing four concessions.

Small busi­ness 15-year exemp­tion (Sub­di­vi­sion 152‑B)
If you are over 55 when you sell a CGT asset (e.g. your busi­ness), have owned the CGT asset for a con­tin­u­ous peri­od of at least 15 years and the sale is made in con­nec­tion with your retire­ment, you can com­plete­ly dis­re­gard any cap­i­tal gain aris­ing from the sale. 

The abil­i­ty to avoid CGT entire­ly on a busi­ness sale is an incred­i­bly valu­able tool in retire­ment plan­ning. If you’re on the edge of these access con­di­tions and not quite sure if you qual­i­fy, be sure to get pro­fes­sion­al advice ear­ly so you don’t inad­ver­tent­ly miss out.

Small busi­ness 50% reduc­tion (Sub­di­vi­sion 152‑C)
If you are not ready to retire or have not owned your busi­ness for 15 years, then an elec­tion under this con­ces­sion allows you to reduce a cap­i­tal gain you make by 50% – in addi­tion to the 50% CGT gen­er­al dis­count avail­able to indi­vid­u­als under Divi­sion 115. This in effect reduces the gain by a mas­sive 75% (if you meet the rel­e­vant conditions).

Small busi­ness retire­ment exemp­tion (Sub­di­vi­sion 152‑D)
This use­ful exemp­tion is avail­able to those under the age of 55. You can elect to dis­re­gard all or any part of a cap­i­tal gain made from the sale of a CGT asset pro­vid­ed you con­tribute the pro­ceeds into a super fund. A life­time lim­it of $500,000 applies, so you can keep util­is­ing this exemp­tion over the course of mul­ti­ple asset sales until you reach the lim­it.

Small busi­ness roll-over (Sub­di­vi­sion 152‑E)
By elect­ing a roll-over, you can neat­ly rein­vest the pro­ceeds from the sale of your exist­ing busi­ness into a new busi­ness (that you either start or acquire) and defer the mak­ing of a cap­i­tal gain from the sale until you ulti­mate­ly dis­pose of the new business.

You have up to two years post-sale to acquire the new busi­ness or you will trig­ger the oblig­a­tion to pay CGT on the orig­i­nal sale. Even if you don’t end up buy­ing a new busi­ness, the roll-over pro­vi­sions could be used to defer your CGT oblig­a­tions for two years to a lat­er income year – with poten­tial­ly sig­nif­i­cant sav­ings if used correctly.

Tak­ing full advantage

If you have spent years build­ing val­ue in your busi­ness, why should you be hit hard with cap­i­tal gains tax when it is final­ly time to sell up?

If used effec­tive­ly, these four CGT small busi­ness con­ces­sions can pro­vide you with sub­stan­tial tax sav­ings and can some­times be accessed in com­bi­na­tion with oth­ers (depend­ing on your cir­cum­stances), so be sure to check with your pro­fes­sion­al advis­er to make the most out of your situation.