When selling your business there are a number of key areas that should be addressed in order to get the best outcome for you.
The structure of your business
It’s always important to look at the structure of your business, from the moment you set up to the moment you exit. Structures vary from trading as an individual, a partnership, trusts and companies, and each comes with a different set of complexities.
Small business capital gains tax (CGT) exemptions
There are small business CGT exemptions available to you when selling a business.
A general discount:
A capital gain is calculated by deducting the costs of acquiring and holding the asset consideration received on the disposal of the asset. This is referred to as the gross capital gain. This capital gain can generally be discounted by 50% if the asset has been held for at least 12 months. There are special rules in dealing with capital and revenue losses, however, companies are not able to access the general 50% discount.
If an asset was acquired pre-CGT (September 20, 1985), any capital gain or loss arising from its sale will be disregarded for the purposes of CGT events.
Small Business Capital Gains Tax (SBCGT) Concessions
There are four SBCGT concessions to be aware of:
1. Small business 15-year exemption
If your business has owned an asset for 15 years, you are aged 55 years or over and are retiring, or if you are permanently incapacitated, then the assessable capital gain from the disposal of assets is reduced to nil when you sell the asset.
2. Small business 50% active asset reduction
You may reduce the capital gain on a business (active) asset by 50% if the asset is used in your business.
3. Small business retirement exemption
A capital gain from the sale of a business asset will be exempt up to a lifetime limit of $500,000. If you are under 55 years of age, the exempt sum must be paid into a complying superannuation fund or a retirement savings account in order to obtain the exemption.
4. Small business roll-over
Should you sell a small business asset, you may defer your capital gain until a later year. This means you don’t include the gain in your income until a change in circumstances causes a CGT event to happen that crystalizes the gain – for example, you don’t acquire a replacement asset within the required period, or you later sell that replacement asset or stop using it in your business. When a CGT event crystallizes, all or part of the gain you had previously deferred, becomes assessable.
To qualify for any of the SBCGT Concessions, there are certain basic conditions that must be satisfied:
Firstly, you must satisfy at least one of the following:
- the entity is a small business entity
- you satisfy the maximum net asset value test of $6,000,000, or
- you are a partner in a partnership that is a small business entity, and the CGT asset is an asset of the partnership.
The government announced further changes to the CGT small business concessions in the 2008 Budget. The changes allow access to the concessions by way of the $2m turnover test for:
- taxpayers who are not carrying on a business but who own a CGT asset used in the business of an affiliate or connected entity, and;
- partners who own a CGT asset used in the partnership business.
In addition to satisfying one of the basic conditions above, the asset must satisfy the Active Asset Test
This step only applies if the CGT asset is a share in a company or an interest in a trust. Should this be the case, one of these additional conditions must be satisfied just before the CGT event:
- you must be a CGT concession stakeholder in the company or trust; or
- the entity that owns the share or interest must satisfy the 90% test
Am I a small business entity?
You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has less than $2m aggregated turnover or less than $6m of net assets.
Steps you should take when selling your tourism and hospitality business
You need to take into account the above scenarios to ensure that you can qualify for the CGT exemptions and pay the least amount of tax.
- Make sure that your business is performing well before considering a sale to get the maximum price for the business you have been running.
- Take note of the exemptions and that to qualify it may take a two-step process to reduce the capital gains tax payable. For example, sell part of the business in the previous year to get under the $2m turnover.
- Sell assets in the previous year to ensure you are under the $6m net asset value.
- Remember you only need to pass one of the tests to qualify.
- Check your age regarding the retirement exemption. If under 55 you will need to transfer the retirement exemption to a superfund. Also check if you have used any retirement exemptions in the past to ensure you qualify for the $500,000 exemption.
Dealing with structures
- With a sole trader only one person can benefit from the CGT exemptions, or in other words, only one person can claim the CGT exemptions.
- In a partnership, each of the partners can qualify to use the exemptions.
- In a Trust, the beneficiaries can qualify for the exemptions.
- A company does not qualify for the general discount, however, the sale of the shares will qualify for the general discount.
View the following example of structures making use of the small business CGT exemptions where:
- The turnover is less than $2,000,000 and;
- The net asset value is less than $6,000,000 and;
- Owned for less than 15 years and been an active asset for more than half the time.
- The business owners are all over 55 years of age.
- The partnership has two active partners.
- The Trust have two people working in the business but have more than two beneficiaries who have received distributions from the trust in the past.
- The company has two shareholders.
The rollover relief can be used if you purchase a new business and the deduction would be the amount that you pay for the new business, as well as any plant and equipment purchased that will be used within the business itself. You do, however, need to use the same entity to make the purchase
The small business CGT law exemptions can be complex, with different business structures eligible for different GGT exemptions and it is therefore important that you see your professional adviser and work with them in order to get the best tax outcome for you on the sale of your business.
HOW CAN RSM HELP?
If you have any questions regarding selling your business, get in touch with your local RSM expert.