If you are planning to sell your business, you may be wondering how you can reduce your tax liability and keep more of your hard-earned money. Selling a business can be a complex and stressful process, and tax is one of the most important factors to consider.
It is important to understand some of the ways you can minimise your tax when you sell your business, including the small business tax concessions that may apply to you.
What is capital gains tax?
Capital gains tax (CGT) is the tax you pay on the difference between the sale price and the cost base of your business assets. The cost base is the amount you paid for the assets, plus any expenses related to acquiring, holding and improving them. The sale price is the amount you receive for the assets, minus any expenses related to selling them.
CGT applies to most assets that you use for your business, such as land, buildings, goodwill, intellectual property and shares. However, some assets are exempt from CGT, such as trading stock, depreciating assets and personal use assets.
How can I reduce my capital gains tax?
There are several ways you can reduce your capital gains tax when you sell your business, depending on your circumstances and eligibility. Some of the common methods are:
- Claiming the 50% CGT discount: If you have owned your business assets for more than 12 months, you may be able to reduce your capital gain by 50%. This means you only pay tax on half of the gain. However, this discount does not apply to companies that are not eligible for the small business concessions.
- Claiming the small business CGT concessions: If you operate a small business entity or have a net CGT value of less than $6M, you may be able to access one or more of the following concessions:
- The 15-year exemption: If you have owned your business assets for at least 15 years and you are 55 years or older and retiring or permanently incapacitated, you may be able to disregard the entire capital gain from selling your business.
- The 50% active asset reduction: If your business assets are active assets, meaning they are used or held ready for use in carrying on your business, you may be able to reduce your capital gain by a further 50%, in addition to the 50% CGT discount. This means you only pay tax on 25% of the gain.
- The retirement exemption: If you sell your active business assets and meet certain conditions, you may be able to exempt up to $500,000 of capital gains from tax. You do not need to retire to access this concession, but if you are under 55 years old, you must contribute the exempt amount to a superannuation fund or retirement savings account.
- The rollover relief: If you sell your active business assets and buy new active assets within two years, or incur expenditure to improve existing active assets within that period, you may be able to defer or reduce your capital gain until a later time.
To qualify for the small business CGT concessions, you must meet certain criteria, such as having an aggregated turnover of less than $2 million or having net assets of less than $6 million (excluding personal use assets and superannuation). You must also satisfy the active asset test and the significant individual test for each concession.
What are some other tips for reducing my tax when I sell my business?
Apart from claiming the CGT discounts and concessions, here are some other tips for reducing your tax when you sell your business:
- Plan ahead: If possible, plan your exit strategy well in advance and seek professional advice from an accountant or a lawyer. This will help you maximise your after-tax proceeds and avoid any pitfalls or surprises.
- Structure your sale: Depending on how you structure your sale, such as selling shares or selling assets, you may have different tax implications and outcomes. For example, selling shares may allow you to access the CGT discount and concessions more easily than selling assets, but it may also expose you to more risks and liabilities. You should weigh up the pros and cons of each option and choose the one that suits your situation best.
- Time your sale: The timing of your sale can also affect your tax liability. For example, if you sell your business in a year when you have low income or high deductions, you may be able to reduce your marginal tax rate and pay less tax on your capital gain. Alternatively, if you sell your business over two financial years, such as receiving part of the payment in one year and part in another year, you may be able to spread out your income and lower your overall tax burden.