The tax outcome on a business sale is shaped long before settlement.
How the business is owned, how long key assets have been held and how the structure has been managed over time can all affect the tax payable when the business is sold.
The sale terms still matter, but by the time a buyer is at the table, some of the most important tax factors may already be difficult to change.
That is why the tax position should be reviewed before the commercial terms of the sale are finalised.
Considering a sale? The earlier you understand the tax position, the more options you may have.
Book a Free Client Assessment →Why the Sale Contract Is Only Part of the Tax Story
The tax outcome of a business sale depends on more than the purchase price.
It can be affected by:
- who owns the business
- whether the sale is of assets, shares or another ownership interest
- how long the relevant assets have been held
- how those assets have been used
- whether small business tax concessions are available
- how the sale price is allocated
- whether GST applies
- whether part of the price is deferred or linked to future performance.
The contract records the transaction, but the existing structure and tax history often determine what options are available.
This is why tax advice should be obtained before the main commercial terms are locked in.
Asset Sale or Share Sale: Different Tax Outcomes
A business sale can be structured in different ways.
In an asset sale, the purchaser acquires specified business assets, such as goodwill, equipment, stock and particular contracts.
Where the business is operated through a company, the purchaser may instead acquire the shares in that company. A sale involving a unit trust may involve the transfer of units.
These structures can produce very different tax and commercial outcomes.
An asset sale may allow the purchaser to choose which assets and liabilities it is prepared to take on. However, different parts of the purchase price may also receive different tax treatment for the seller.
In a share sale, the company continues to own the business and remains responsible for its existing liabilities. The purchaser acquires ownership of that company and therefore takes on the economic risk associated with those liabilities.
Neither structure is automatically better.
The right approach depends on the seller's existing structure, the assets involved, available tax concessions and what the purchaser is prepared to accept.
Small Business CGT Concessions: Check Eligibility Early
The small business capital gains tax concessions can significantly reduce, defer or in some cases eliminate capital gains tax on the sale of an eligible business asset.
The four concessions are:
- the 15-year exemption
- the 50% active asset reduction
- the retirement exemption
- the small business rollover.
They are not automatic.
Eligibility can depend on matters such as the size of the business, the net value of relevant assets, how the asset has been used and, for shares or trust interests, additional ownership and control requirements.
The conditions should be checked well before the sale contract is signed.
Business owners should not assume they qualify simply because they consider themselves to be a small business.
The tax outcome can also depend on the entity making the gain. For example, companies are not entitled to the general 50% CGT discount that may be available to eligible individuals and trusts, although a company may still be able to access relevant small business CGT concessions.
Where Trust and Company Structures Change the Result
The entity that owns the business can materially affect how a gain is taxed and how the sale proceeds ultimately reach the owners.
Where a discretionary trust sells a business asset, the treatment of the capital gain may depend on the trust deed, the beneficiaries entitled to the gain and whether the relevant tax requirements for streaming capital gains are satisfied.
Where a company sells business assets, the company is generally taxed on the resulting gain.
The tax consequences of then extracting the sale proceeds for shareholders need to be considered separately.
That second step can be important.
A sale that looks tax-effective at the company level may produce a different overall result once the owners want to access the cash personally.
Small business CGT concessions can alter these outcomes in some circumstances, but detailed conditions apply.
The structure should therefore be reviewed before the transaction is finalised rather than assuming the proceeds can simply be distributed in the most tax-effective way after settlement.
The Contract Date Can Determine the Tax Year
Timing can affect the tax outcome of a business sale, but the relevant date is not always settlement.
For many CGT assets, the CGT event occurs when the binding disposal contract is entered into.
This means a contract signed in June and settled in July may still give rise to a capital gain in the earlier financial year.
That timing can affect matters such as:
- available capital losses
- other taxable income
- eligibility for particular concessions
- year-end tax planning.
Different assets and transaction structures can have different tax rules, so the relevant tax dates should be checked before the contract is signed rather than relying on the settlement date alone.
Do Not Forget GST
An asset sale can also have GST consequences.
Depending on how the transaction is structured, the sale may potentially qualify as the GST-free supply of a going concern.
Specific requirements need to be satisfied, including conditions relating to what is supplied, the continuation of the enterprise and the parties' agreement.
The GST treatment should be reviewed and documented correctly in the sale contract.
It should not be assumed that the sale is GST-free simply because the whole business is being sold.
Earn-Outs Can Change the Tax Analysis
Sometimes part of the purchase price depends on how the business performs after settlement.
These arrangements are commonly called earn-outs.
Specific tax rules can apply to qualifying earn-out arrangements, and the treatment may differ from a straightforward fixed-price sale.
If part of the sale price is deferred or linked to future revenue or profit, the tax consequences should be reviewed before the earn-out formula is agreed.
Preparing the Numbers Still Matters
Tax planning is only one part of preparing for sale.
A buyer will also want confidence that the financial information supports the asking price.
That means having reliable financial statements, current management accounts, a sensible add-back schedule and a clear explanation of unusual items before due diligence begins.
The structure of the business affects the tax outcome. The quality of the financial records affects whether the buyer accepts the value being presented.
Both need to be addressed before the sale process is well advanced.
Getting your financials in order before you sell also protects the price a buyer is willing to pay, not just the tax you pay on it.
Selling Your Business: Getting the Numbers Sale-Ready →Do Not Restructure Just Before Sale Without Advice
A business structure that worked well for many years may not be the most tax-efficient structure for a sale.
However, that does not mean it should be changed immediately before going to market.
A restructure can itself trigger tax, duty, GST and legal consequences.
It may also affect eligibility for concessions or create issues with contracts, trusts, ownership and commercial arrangements.
If the existing structure is a concern, it should be reviewed early enough to properly assess whether any change is worthwhile.
How Phan Campbell & Associates Can Help
At Phan Campbell & Associates in Footscray, our accountants and lawyers can work together on the tax and legal aspects of a business sale.
Our accounting team can model the likely tax outcome, review eligibility for available concessions and identify issues arising from the existing structure.
Our lawyers can advise on the sale structure, contract, due diligence and legal risks involved in the transaction.
By working from the same plan, the tax treatment and legal documentation can be aligned before the sale terms are finalised.
If you are planning a sale, get the tax position checked before the contract is signed.
Book a Free Client Assessment →
Frequently Asked Questions
1. Is it better to sell the business assets or sell the shares?
It depends on the circumstances. An asset sale and a share sale can produce very different tax and commercial outcomes. The right structure depends on the entity that owns the business, the assets involved, the buyer's risk position and the tax concessions available to the seller. It is a negotiation point, not simply a drafting choice.
2. What are the small business CGT concessions?
They are a group of concessions that can reduce, defer or in some cases eliminate capital gains tax on eligible business assets. They include the 15-year exemption, 50% active asset reduction, retirement exemption and small business rollover. Detailed eligibility rules apply, so the position should be checked before the sale contract is signed.
3. Does selling through a trust or company change the tax outcome?
Yes. The tax treatment can differ depending on whether the business is owned personally, through a company or through a trust. A trust may have different options for dealing with capital gains, while a company is taxed separately and the later extraction of sale proceeds by shareholders can create additional tax consequences.
4. Does the timing of a sale matter for tax?
Yes. For many CGT assets, the relevant CGT event occurs when the binding sale contract is entered into, not when settlement occurs. A contract signed shortly before 30 June may therefore fall into that financial year even if settlement takes place after 1 July. The timing should be reviewed before the contract date is agreed.
5. Does GST apply when I sell a business?
Potentially. An asset sale may qualify as the GST-free supply of a going concern if the relevant requirements are met, but the treatment should not be assumed. The GST position should be checked and documented correctly in the sale contract.
This article contains general information only and does not constitute legal, tax, accounting or valuation advice. The tax consequences of a business sale depend on the ownership structure, assets, sale terms and individual circumstances. Specific advice should be obtained before entering into a sale agreement.