Jim Goodwin from GMO and Clinton O’Neill from Thorntons discuss Capital Gains Tax on sale of a business. You should consider these implications as part of your business sale plan.
J.G: Do I pay tax on the whole sale price of my business?
C.O: No, you pay tax on the net capital gain from sale of goodwill, along with any balancing adjustments on plant & equipment.
J.G: How is the net capital gain on business goodwill calculated?
C.O: Your net capital gain is calculated by deducting your CGT cost base, from the net proceeds on sale of the business goodwill. This is then reduced by any discounts & exemptions.
J.G: I setup my business from scratch years ago. Do I have a CGT cost base?
C.O: It’s likely that your CGT cost base is $nil. Only when you have purchased a business, will you have a CGT cost base for goodwill.
J.G: How do you calculate the proceeds for the sale of goodwill, from the total sale price of the business?
C.O: The “Offer & Acceptance” or “Agreement to Purchase a Business” document usually gives a breakdown of the total sale price between; goodwill, plant & equipment and inventory/trading stock.
Some contracts are silent on the breakdown. This is usually the case when the vendor and purchaser cannot agree on the terms of the split. In that case, the ATO requires each party (or their accountants) to use a “reasonable apportionment”.
J.G: Why would there be a difference of opinion between the buyer & seller on the split if they agree on the total price?
C.O: The seller usually wants as much as possible allocated to goodwill (so they can apply concessions in reducing their capital gain) and the buyer usually wants as much as possible allocated to plant & equipment (to maximise their future depreciation deductions).
J.G: How is the balancing adjustment on plant & equipment calculated?
C.O: The balancing adjustment is the profit (or loss) on sale. Calculated as proceeds, less closing written down value or pool balance (on the depreciation schedule at settlement date).
J.G: Why isn’t there any profit/loss on sale of inventory/trading stock?
C.O: Inventory/trading stock is usually sold at cost, unless it is outdated and not worth that.
J.G: What rate of tax is paid on a net capital gain?
C.O: Capital gains tax (CGT) isn’t a separate tax, just the term used for any tax applicable on a capital gain. CGT is payable at the marginal rate of the taxpayer, like any other taxable income. The gain will be added to any other income of the taxpayer in the year of sale.
J.G: I operate a franchised business as a franchisee. How does the above apply to me?
C.O: All the above will still be applicable. The only variation is that you may also have an “initial franchise fee” which would also form part of the CGT cost base for goodwill.
If this has you thinking of your CGT exposure, get in touch with us
J.G: Are there any special concessions available?
C.O: Yes, there are a few. The most basic is the 50% General CGT Discount. This is applicable for all CGT assets held > 12 months (unless you are a company structure).
There are also some significant concessions available if you are a Small Business Entity (SBE). These include the 15 Year Exemption, 50% Active Asset Reduction, Retirement Exemption and Replacement Asset Rollover.
J.G: How do you qualify as a Small Business Entity?
C.O: The business being sold must have an aggregated turnover of < $2mil. If you cannot pass this test, then your net assets must be <$6mil. This is a complex area of taxation and further conditions apply in certain circumstances.
J.G: In simple terms, how do each of the SBE CGT Concessions work?
C.O: Firstly, you need to qualify as an SBE, then you need to pass certain tests for each applicable concession. If you pass these, the concessions work as follows;
15 Year Exemption – If you have owned/operated an active business for 15 years or greater, the full gain may be exempt from CGT altogether.
50% Active Asset Reduction – 50% discount applied, in addition to the 50% General CGT Discount. This reduces the original gain to only 25%.
Retirement Exemption – There is a lifetime limit of $500k per person, where any amount applied, reduces the net taxable gain. If the owners are <55yrs, this amount must go into super and if >55yrs, it can be taken tax-free, as cash.
Replacement Asset Rollover – You may want to replace the sold business with another business asset, purchased up to 12 months before or up to 2 years later. If applied, the gain on the sold business is disregarded until you sell the replaced business (i.e. it essentially reduces the cost base of the replacement asset). Note that it is possible to apply this rollover, even if you have no intention to buy a replacement asset. By doing this, you are getting a 2-year deferral!
J.G: So is it possible to pay no tax whatsoever, from the application of these concessions.
C.O: Yes, it sure is possible. Careful planning with your trusted advisor is required though!
J.G: If I’ve sold the business as part of my retirement, can I put this money into super?
C.O: Refer to the SBE Retirement Exemption and 15 Year Exemption above.
J.G: What if I operated my business through a company?
C.O: The SBE CGT Concessions above will still apply (except the 50% General CGT Discount). The main difference being, to be able to access any non-taxable amounts from the company (e.g. 50% Active Asset Reduction), your company needs to go through a formal liquidation process. This is quite technical, however a trusted advisor will be able to do all the hard work for you.
There is one alternative to this and that is, you can sell the shares in your company to a buyer. Although this is not recommended from the buyer’s point of view, it is possible. However further rules apply.
J.G: If I’ve been in the same business since before 20 September 1985, do I still need to pay CGT?
C.O: Most likely not. The 20 September 1985 is the date the that Capital Gains Tax came into existence. If your asset was purchased (or created) before that date, it is quarantined and CGT is likely to not apply.
J.G: Are you happy to meet with business owners if they need CGT advice regarding sale of their business.
C.O: Sure! Happy to have a quick chat on the phone, then book in a meeting. We can determine what would be involved and provide your clients with a fee estimate.
If you are considering selling your business, contact GMO for assistance from start to finish. Thorntons also welcomes the opportunity to meet with you, to discuss any queries you have regarding potential Capital Gains Tax exposure.
Disclaimer: Please note that the above has been provided as general information and does not consider your specific circumstances. As such, it should not be taken as taxation advice.