Business owners worldwide often find themselves surprised or in a bind when they open or sell their business because they didn’t anticipate the tax obligations that come with it. Tax can get pretty complicated if you don’t know what you’re doing; that’s why so many businesses hire accountants. Having a basic understanding of what you’re in for is always helpful, which is precisely what we hope to provide for you today!
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Capital gains tax
When you sell a business, you may be required to pay capital gains tax. Usually, a business sale is considered to be a CGT event. This means that if there is a capital gain on the sale of your business. In most cases, there would be a capital gain if the capital you earn from the sale of an asset is more than its initial cost. For example, if you bought a property with the business for $100,000, but sold it for $150,000, you would pay capital gains tax. This is just a simple example to get the principle across, The Australian Taxation Office has implemented CGT concessions for selling small business assets, for instance:
- If the assets are active, small businesses are required to pay 50% CGT
- If the sale of an active asset worth up to $500,000 is in connection with retirement, you may not have to pay tax at all
- If you’ve owned the asset for 15 years or longer, you may not have to pay CGT
- Some businesses can also offset the CGT by reducing it by the losses they incurred in the previous financial year
- Individuals or trusts can also reduce their capital gains tax by 50% if they have owned the asset for over 12 months
Goods and Services Tax
Goods and services tax (GST) is a 10% tax added to the sale of most goods and services in Australia. For business sales, GST is usually not included, provided all the parties involved meet the specific criteria.
Generally, this requires the business to be sold with everything needed for it to continue as normal and to run as normal until the day of its sale. This usually applies when the sale is of a “going concern.” These sales are GST-free if the sale is for payment, the parties involved are registered for GST, and both parties have agreed in writing that the sale is of a going concern.
Income tax
When it comes to selling a business, you also need to factor in income tax. Any net capital gains a taxpayer makes per year, which can include the sale of the business, would usually be included in their total income for that year and thus taxable. Here’s how you can work out your net capital gains for a financial year:
- Add up all your capital gains for the year
- Reduce the CG by losses
- Do so again by reducing it with any losses you missed in the last year
- If you’re entitled to a reduction in percentage, reduce this amount again by that percentage. For instance, if you’re an individual who has had a property for 12 months, then you’re eligible for a 50% reduction
- If you’re are eligible for any small business concessions, apply those too
- Add the capital gains leftover, and this is what your net capital gains would be for the next year
Can you reduce your tax?
Thankfully, yes, if a business sale is done on the basis of a going concern, then it could be free of goods and services tax. Likewise, you could apply for some of the above concessions regarding capital gains tax. In regard to personal income tax, investing in your superannuation could be a means of reducing your income tax liability.
Where to find help?
Handling tax can be difficult, especially if you’re trying to sell your business and want to reduce your liability as much as possible. If you’re on this boat, contact Lloyd’s corporate and get help from a corporate advisory specialist. As professionals in the industry, they can help you plan your exit strategy to limit the tax you pay and smooth out the sales process.
Final thoughts
There is still a lot more to learn about tax implications for businesses in Australia, so if you’re a business owner, we recommend doing some homework to know exactly what’s expected of you regarding tax. Likewise, if you ever consider selling, ensure you have a trusted advisor in your corner helping you create a strategy to navigate tax effectively.
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