Selling a Business, Tax and Property Proceedings
I WANT TO SELL MY BUSINESS AND RETIRE?
I AM IN THE MIDDLE OF FAMILY LAW PROPERTY PROCEEDINGS.
WHAT TAX WILL I HAVE TO PAY?
When selling a business you always have to be aware of the tax implications of any proposed sale.
This can become further complicated if you are anticipating retirement and then you have to consider the prospect of a property settlement.
The Operation of your Business
Do you run the business as a sole trader or through a company? The tax rate for a small company is 27.5 % and for an individual the marginal tax rate can be up to 45% of income.
The sale of your business, including the stock and any depreciated value of plant and equipment will be taxed as income at the appropriate rate.
In addition to your personal income tax, a number of tax issues arise when disposing of the assets of your business. Capital Gains Tax (CGT) and Goods and Services Tax (GST) will affect the value of the sale.
If the sale of the business becomes part of a property settlement, it is important that you work out any indemnity clauses as these can place an unfair burden on one party.
Any loan accounts will need to be considered, and whether the loan is in credit or debit.
Capital Gains Tax
CGT has applied since September 1985 and is payable on the sale of capital assets. Capital assets in a business have a useful life longer than 12 months and generally would not be intended for sale as part of the business’ operation.
CGT will only apply to assets you acquired after 20 September 1985. You will need to itemise any capital assets acquired after that.
What is the capital gain?
If an asset is sold, the capital gain will be the sale price less the cost base, which is the amount, originally paid as well as associated costs such as any fees for brokerage and conveyancing.
For example: You bought a shop for $400,000 in 2000 and it is now worth $600,000.
In the proposed sale of the shop if CGT applies, your capital gain, before any discounts, would be:
$600,000 - $400,000 = $200,000.
There is a general CGT discount of 50% if an asset has been held for 12 months. The $200,000 profit would then be taxed at your marginal tax rate, which we assume would be at 45%.
CGT = capital gain x marginal tax rate = $200,000 x 45% = $90,000
The plant and equipment would also be subject to CGT. You should be wary if these have been depreciated and a potential buyer inflates their price as you will be taxed on the increase in value. You should always press for your written down valuation to be accepted as otherwise the ATO would tax the depreciation claimed as income.
Tax Concessions
The ATO lists 4 concessions that may eliminate all or some of the capital gain of an active asset in a small business.
The 15-year exemption: You have owned many of the business assets for 15 years, you are aged over 55 and you intend to retire;
The 50% active asset reduction: This applies in addition to the general 50% for 12 months’ ownership;
The retirement exemption: This provides that capital gains on active assets may be exempt up to the lifetime limit of $500,000. As you are over 55, you can receive the sale proceeds in cash;
Rollover: You can defer part or all of any capital gain from an active asset for 2 years if you acquire a replacement asset. This is unlikely as you wish to retire however may apply if you defer retirement and also allows you to spread your income across 2 years.
Goodwill is classed as an active asset as it is inherently connected to how you carry on your business. You will not pay tax on the net capital gain from sale of goodwill if you can take advantage of exemptions so it is desirable to achieve the highest possible amount for goodwill and restraint of trade to reduce CGT. As the seller, you will be able to claim as deductions any wages and leave entitlements up to the sale completion.
Goods and Services Tax (GST) and Sale of a Going Concern
GST would apply to a property transaction when the property is used to conduct a business that has a turnover above the GST registration threshold of $75,000. The sale of capital assets such as office equipment or even key-cutting machinery would be taxable sales.
If you sell the shop or office where your business operated, the premises would be subject to both CGT and GST.
Selling your business and everything associated with running it, as a going concern, can avoid adding GST to your sale price. Both the vendor and purchaser must be registered for GST. To qualify for the going concern exemption, you must sell the whole business, goodwill, plant, equipment, and stock in trade and continue to run the business until the sale is completed.
The purchaser must continue to conduct the business after the sale. No extra stamp duty would be required.
Family Law Proceedings
If you are in the middle of Family Law Property Proceedings, you will not be allowed to go ahead with the sale of your business immediately.
You and your former partner will have to comply with full and frank disclosure of all your financial dealings, assets and liabilities.
Any loan accounts will need to be considered, and whether the loan is in credit or debit. When the business is valued, repayment arrangements should also be part of the process. Any car claimed by the business or leasing arrangement will also have to be taken into account.
If you can work out Consent Orders and avoid going to Court Proceedings you may be able to make the sale of the business as part of the orders for the property division between the parties.
In doing so, you should be aware of the tax considerations so that you are not left with an unfair burden of liabilities. All profit and loss of the business must be fairly taken into account in the balance sheet and financial statements that are prepared for both parties so that a just and equitable outcome is provided for in the consent orders.
Recommendations
The purchaser of a business, whether a company or sole trader, will set the valuations of your assets to minimise tax liabilities, which disadvantages the vendor. You should negotiate to reduce the plant and equipment price to the written down value your accountant or valuer has worked out. As some stock may be aged, you should work out a realistic compromise on this value. As the seller, any value for stock is assessable income so you do not want to pay tax on an inflated value.
An independent market appraisal would assist in achieving a higher price for the shop premises giving you more tax-free funds for your retirement.
You could also consider selling the operating business in one tax year and the shop premises in the next financial year, spreading your income across the two years.
This is advice only and you should check with a tax lawyer and your accountant.
In addition, when property proceedings are in place, we work closely with counsel to optimise the outcome for our client.
This is information only and is not legal advice. Each case is decided on its facts.