If you have worked hard on your business for many years, you are likely to have a plan to sell it at some stage.
One question we are often asked about at Crest is how tax applies on the sale of a business. There isn’t a black and white answer, but this article will give you an understanding of how it all works.
Paying tax on a business sale
The sale of a business is counted by the Australian Tax Office as part of the business’s taxable income. Think of it as your parting ‘gift’ to the tax office!
The tax rate you pay on the sale of your business depends on the form it takes, with the two most commonly sold structures in Australia being sole traders/trusts and companies.
- Business sale tax for sole traders and trusts
For sole traders and trusts that distribute to individuals, the amount of tax you pay depends on the value of the business at sale. The tax rate is separated into two brackets:
- $90,001 – $180,000: a rate of $20,797, plus 37% on every dollar over $90,000
- $180,001 and above: a rate of $54,087, plus 45% on every dollar over $180,000
Both brackets also incur the Medicare levy fee of 2%.
- Business sale tax for companies
Tax on companies is usually between 25% and 30%, depending on base entity rules.
Capital Gains Tax
Capital Gains Tax (CGT) applies to the sale of all businesses in Australia, regardless of structure because a sale is regarded as a capital gain.
The ATO considers capital gains to be any profit that your business brings in by selling assets. CGT is the tax the ATO charges on that profit.
Therefore, selling a business for more than it was bought for is a capital gain and will be taxed.
Capital gains tax will vary depending on:
- The initial cost of establishing the business
- The sale price
- The businesses tax structure
- Possible tax concessions
- Total income earned over 12 months
Minimising your tax bill
As inevitable as taxes are, there are always ways to make sure you don’t overpay.
Small businesses have the most options available to apply for tax concessions. The ATO classes small businesses in Australia as:
- Having an annual turnover of less than $2 million
- Having net assets worth less than $6 million
If you are a small business, there are a number of concessions you may be able to apply for, including:
- 50 per cent capital gains tax reduction: If you have owned your small business for more than 12 months, you may be eligible for this deduction.
- 50 per cent active asset capital gains tax reduction: An active asset is an asset that has been in use for more than half the time that a business owner has owned them. A business clearly falls into that category, so falls into the eligibility for the 50 per cent active asset capital gains tax reduction.
- 15-year capital gains tax exemption: If you are over 55 and have owned the business for over 15 years, you may be eligible for a complete exemption if you are selling to retire.
- Retirement exemption: You can ignore up to $500,000 of the capital gains tax incurred if you are retiring. If you are under 55, you must place the capital gain amount into an allocated superannuation fund.
- Small business roll-over capital gains tax exemption: It may be possible to roll your capital gains tax over to a new asset. You even have two years to find the replacement asset.
Your lawyer and accountant can help you understand which of these you may be eligible for.
Asset sales or share sales
When you sell your business, you have the option of doing an asset or a shares sale:
- An asset sale means the sale of the entire business, including all physical assets.
- A shares sale is when you sell off enough company shares to move ownership to another business entity.
The best solution
You will always pay tax on a business sale, so the best way to make sure you don’t pay incorrectly is to seek professional help.
An experienced lawyer and accountant will help you understand all the options above so you can structure your business correctly to sell it. This may require several months or even years of planning but it will be worth it.
Don’t forget, there are many other steps involved with selling a business beyond being aware of tax. Your accountant and lawyer can help you ensure it is in great shape so you can sell quickly, easily and for a great price.
Need help to sell your business and maximise your profits? Contact Crest Law today.
Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.