Tax considerations when selling a business

Careful planning is required to ensure up to half the business value is not lost in tax. But if planned correctly, there is every chance that a business can be sold tax-free.

There is no one-size-fits-all approach to business succession planning, and the best approach will depend on each individual’s particular situation. But there are some general questions to ask to help ensure the best outcome.

One of the most important things to keep in mind is how to make the most of the small business capital gains tax (CGT) concessions, since these can drastically reduce – or in some cases completely eliminate – the tax payable on the profit made from selling a business.

Negotiating terms of sale

It is often more tax-effective for individuals or family trusts to sell their shares in an operating company than it is for the company to sell its business assets and then distribute the net proceeds out to the shareholders.

This might be easier when the succession involves selling to a senior employee already working in the business, but it can also work for an outside purchaser. 

Reviewing the structure 

For business owners looking at a possible exit in, say, five years or more, now is the time to review the business structure and consider any improvements that can realistically be made.

For example, many companies start out being owned directly by one or more individuals but it may be more flexible and tax-effective for the shares in the operating company to be held by a discretionary family trust.

Restructuring into a company owned by a family trust can be done using the small business CGT exemptions and relevant stamp duty concessions (these will vary by state).

Traps that can affect the way the small business CGT concessions apply to a business sale includes the mix of business assets versus non-business assets in a company or trust, as well as the existence of different classes of shares such as discretionary dividend access shares, non-voting shares or preference shares generally.

Where any of these exist, it is worth reviewing the opportunities for changing the arrangements before a business sale takes place, and whether this will improve access to the small business CGT concessions. 

Keep in mind that timing is a crucial consideration. It is important not to undertake restructuring arrangements too close to an external sale agreement since the ATO has wide-ranging anti-avoidance powers and is becoming increasingly willing to use these powers when it sees an arrangement it does not like.

Passing over control 

In some instances, it can be fairly straightforward for a business to pass from one owner to another without too many problems for staff.

However, if the business owner has taken a very personal and hands-on approach to running the business, there may need to be a transition period that allows employees to get used to the new owners. 

And if the business is family-owned, this will almost certainly need to be carefully managed.

The first step should be a careful review of the current structure, and consideration of the options available.

The advantage of passing control within the family is that it is easier to ensure it is done in the way that best suits the older generation as they exit the business, as well as those members of the next generation who will be taking over the business, and those siblings not involved.

Again, the small business CGT concessions will be useful, especially if the older generation is aged over 55 and they have access to a wider range of benefits. 

The concessions can be used whether they are ready to retire and enjoy life outside the business, or where they are not yet ready to completely leave the business but are looking for a phased exit. 

Other family business issues

There are special tax rules applying to assets passing through someone’s will after their death, and this can be a tax-effective option. 

It’s a good idea – and can potentially save a lot of angst – if the family’s plans are reviewed while the parents are still alive to contribute to the process (and possibly keep the peace if there are tricky issues to navigate). 

One of the greatest challenges can be ensuring that everyone is treated fairly, including those siblings not directly involved in the business. 

Ideally, there will be enough wealth in the family, such as investment properties and share portfolios, to give them other assets of an equivalent value to the shares in the business. But not everyone is that lucky. 

Even where this can be done, great care must be taken to manage the tax arising from asset transfers to ensure that when some family members pay more tax than others, everyone else shares the pain.