There are many taxation issues that may arise when selling your business. While there is no magic bullet to maximise your tax position for every business sale, there are some key points that may prove to be money-savers if you factor them into your sale negotiations, writes Eddie Chung.
The following points will help clear up some common misunderstandings and oversights when it comes to selling a business, and ensure you receive the best possible value for the asset you have worked hard to build up:
Do not apportion the sale price across various assets on the contract
It is likely that maximising or minimising the values associated with certain assets (e.g. trading stock, depreciating assets) to optimise your tax position may deteriorate the purchaser’s tax position.
Avoiding contractually attributing set values to the assets enables the parties to attribute independent values to those assets based on a reasonable allocation and apportionment of the total transaction value across all of the assets sold. This affords both parties some flexibility to independently optimising their respective tax positions.
Delay the contract date where possible if the agreement to sell is near the end of the financial year
For capital gains tax (CGT) assets – which include assets such as goodwill and real property – the CGT event associated with their sale is generally crystallised on the date of the contract, rather than the settlement date.
Therefore, delaying the contract from, say, 30 June 2016 to 1 July 2016 will have the effect of delaying any CGT payable on the sale for 12 months. Tax deferred is tax saved.
Negotiate to make a separate ‘accrued leave transfer payment’ to the purchaser where possible
This is because the payment will be tax-deductible to you as the seller. This contrasts with the situation where the unpaid leave liabilities are adjusted against the overall sale price of the business, which may reduce your CGT instead.
Given the potential application of the 50 per cent CGT discount and/or other CGT concessions, the tax benefit associated with paying the unpaid leave employee entitlement and claiming a tax deduction for it is likely to be significantly greater than the tax benefit from reducing the sale price of the business by the liabilities assumed by the purchaser.
A word of caution, though: specific conditions must be satisfied before the payment is treated as an ‘accrued leave transfer payment’.
For instance, the payment must be made to another entity that has begun (or is about to begin) to be required to make payment in respect of the leave liability under an Australian law, award, order, determination or industrial agreement.
Therefore, if you are selling your trading entity to the purchaser and that entity will continue to be liable for the payment of the leave liability in future, the payment may no longer qualify as an accrued leave transfer payment.
Consider if there are ways to pass on any carried forward tax losses you have incurred during the course of your ownership of the business to the purchaser
Doing so gives you negotiation leverage and potentially increases the sale price. Be mindful that the ability of the purchaser to use those tax losses will depend on a number of factors.
For instance, as tax losses are attached to the particular entity that incurred the losses, the purchaser will need to purchase the trading entity to acquire those losses; certain conditions associated with the loss recoupment rules for the specific type of entity must also be satisfied for the losses to be available to the purchaser.
Further, being able to sell your interest in the entity (e.g. shares in a trading company), rather than selling your business out of the entity, may also enable you to access other concessions, such as the 50 per cent CGT discount, that would not otherwise be available.
If the purchaser is reluctant to buy the entity and inherit the historical trading risks of the business, you may consider offering contractual warranties over a finite future period to provide indemnities to the purchaser if those risks materialise.
Sometimes reducing the purchase price works too, if the price reduction is more than compensated for by tax concessions that would not otherwise be available.
Do not forget to apply available tax concessions that allow you to legally reduce your tax bill on the sale of your business
The most common concession is perhaps the 50 per cent CGT discount, which allows you to reduce the capital gain on the sale of a CGT asset by half, provided that the business asset has been held by an individual or a trust for at least 12 months before sale.
In addition, the ‘small business CGT concessions’ is a suite of extremely potent CGT concessions that have the potential to substantially reduce or even eliminate your CGT liability altogether if your aggregated group net asset value is less than $6 million (excluding your main residence and superannuation benefits) or your aggregated group turnover is less than $2 million.
Special rules apply to how you calculate these amounts and which entities within your group are to be included.
Proceed with caution if you are applying these concessions – these rules can be complex and prescriptive, so you need to ensure that you ‘tick every box’ to qualify for the concessions. Getting them wrong may lead to the Tax Office coming back to you later on to deny your claim.
For completeness, under the ‘look-through approach’, if you structure the business sale so that you get paid by the purchaser in instalments that are dependent on the future performance of the business (commonly known as an ‘earn-out arrangement’), those future instalments may also qualify for any CGT discount or small business CGT concessions that may have been claimed when the business was sold.
Ensure that you correctly apply the relevant GST exemption that may apply to the business sale
For instance, under the ‘supply of a going concern’ GST-free treatment, if you sell everything that is necessary for the purchaser to continue the operation of your enterprise (or part of an enterprise), it is likely that the business sale will not attract GST, despite the fact that you are the ‘supplier’ in the transaction.
Again, the devil is in the detail, so you need to ensure that the way you structure the sale will enable you to access the exemption (for example, if you sell the business and business premises to separate entities that belong to the purchaser).
As a precautionary measure, it is always advisable to incorporate a ‘GST recovery clause’ on the sale contract to enable you to recover any GST from the purchaser if the Tax Office subsequently decides for whatever reason that you were not eligible to apply the GST exemption.
The sale of a business may seem reasonably straightforward, but this is often not the case when you get down to the detail. It is always advisable to involve both your lawyer and accountant to guide you through the sale and ensure that they work together to achieve the best result for you.
In particular, all draft contracts and agreements should be reviewed by your accountant from a tax perspective to ensure that you legally minimise your tax liability and maximise the return on all your blood, sweat and tears in building the business up for sale.
Eddie Chung is a Brisbane-based partner with accounting firm BDO Australia. He specialises in working with SMEs as well as businesses operating in the property and construction sectors.