Selling your business - different structures mean different tax

Just a quick one from me.

Over the last 18 months I have helped 6 business owners sell 4 businesses. In each transaction, it was important for the owner to fully understand and consider the options available in relation to the tax consequences of selling their business in its existing legal structure. This consideration, paired with commercial reality often formed a major part of the seller/purchaser discussions on the type of sale.

In initially structuring a privately owned business various considerations need to be made. These can include commercial requirements, asset protection and tax considerations just to name a few.

This decision will contribute greatly towards achieving strategic objectives like geographic expansion, capital raising, cashflow management, etc. It is also a decision that may need to be revisited if no longer suitable (such as this), but one that may be costly.

It is generally the case that when selling a private business, it will either be done so by selling the business assets (asset sale) or by selling your interest in the legal structure. The most common structures we see are a private company or unit trust.

• Asset Sale - In this circumstance you are likely to have a number of events for tax purposes. These will either be on revenue account (sale of trading stock or depreciable assets) or capital account (sale of goodwill). In an asset sale, the entity that is selling the assets will be the entity that makes the gains (or losses) on selling the various assets. This will mean that the entity itself is taxed. For a company, this results in company tax at the company's applicable tax rate. In this instance, any capital gain will also not qualify for the 50% CGT discount. Additionally, when the gains are to be extracted from the company, there will likely be additional top-up tax (depending on the amount and the shareholder). This should be considered carefully as it may sometimes not be ideal. For a trust, the tax will be paid by the ultimate beneficiaries (assuming there is an effective distribution resolution). The beneficiaries, if individuals will likely qualify for the 50% discount on any capital gain should the capital asset have been held for longer than 12 months.
• Share/Unit Sale - In a share or unit sale the shareholder or unitholder are the ones making the gain. Unless the profile of the interest holder means that the sale is on revenue account, the gain (or loss) from selling shares/units will be on capital account in most cases. This means that the shareholder/unitholder will recognise the capital gain and have access to the 50% CGT discount if the shares/units were held longer than 12 months.

Obviously there are many more considerations other than just the tax consequences of the particular business structure. A few that come to mind include:

• Tax on any earn-out agreements and whether the clauses of the agreement qualify as 'look through earn-out rights'.
• Tax considerations on the repayment of any shareholder / unitholder loans and whether they need to be repaid prior to sale. The method of repayment can have differing effects from a tax and commercial perspective.
• GST
• Available rollovers or Small Business Entity CGT Concessions

As you can see from the above, it is important that business owners understand their likely tax position prior to entering any business sale process.

Ensure that you talk with your adviser, or feel free to contact me.