Thinking of selling your business? Learn how capital gains tax (CGT) can transform your business sale.
For the majority of small to medium-sized business owners, the value of your business is your biggest asset, and very likely, your retirement fund.
Upon the sale of your business, it is critical you receive the maximum available net proceeds. However, many taxpayers miss this chance through poor transactions planning and the holding of assets in inappropriate structures. Capital gains tax (CGT) for business assets is important in strategic business valuation. Just because you consider yourself a small business does not mean you have automatic access to all available CGT concessions.
While the rules are complex, if the correct planning is in place, a husband and wife team can receive up to $4 million tax-free after the sale of their business. (If you’ve run your business for at least 15 years, all the sale proceeds might be tax free!)
Do not sell without first gaining professional advice from our KMT adviser on CGT!
Key considerations of CGT
- Companies do not receive the 50% general discount
- The owner(s) need to have owned the business / asset for more than 1 year – CGT discount 50%
- Taxpayer group:
- Must be under $6M in net value; or
- Under $2M turnover threshold
- Any assets sold must be ‘active assets’ used in the business for a certain period
- To maximise the concessions, the business owner(s) might need to use the ‘retirement exemption’, rolling up to $500,000 per individual of their sale proceeds into superannuation
ULTIMATE CGT POSITION
Capital Gain
Less
CGT Discount (50%)
Active Asset Reduction (50% of Balance)
Retirement Exemption (2 x $500,000)
TOTAL
$4 Million
–
$2 Million
$1 Million
$1 Million
$4 Million
Effective planning for the sale of your business can make a huge difference to your after-tax return – up to $4M
Here is an example
A client approached us with a plan to sell their business in two years’ time. The business was owned in a company structure and because the client had time on their side, we were able to implement a solution to ensure all considerations were met. Below is a comparison study showing the change in the client’s net result, assuming the final capital gain is paid out to an individual from the company, before and after our meeting with them.
–
Business Goodwill
Business Premises
Investment Properties
Cash/Shares/Managed Funds
Value of Family Home
Value of Superannuation
Less
Family Home (excluded asset)
Superannuation (excluded asset)
TOTAL ASSETS INCLUDED
BEFORE
$3.0M
$1.5M
$800k
$1.0M
$1.0M
$500k
–
$1.0M
$500k
$6.3M
AFTER
$3.0M
$1.5M
$800k
$400k
$1.0M
$1.1M
–
$1.0M
$1.1M
$5.7M
As you can see above, by converting $600,000 of liquid assets (cash/shares) and making a non-concessional contribution to superannuation, the small business CGT concessions can now be applied as the total asset values included for the small business calculations is now under $6M. So, after executing the above strategy, the result we can achieve after sale of business goodwill will be:
–
Capital Gain
Less
CGT Discount (50%)*
Active Asset Reduction (50% of Bal)*
Retirement Exemption (2 x $500,000)*
Assessable Capital Gain
TOTAL
BEFORE
$3.0M
–
Nil
Nil
Nil
$3.0M
$825,000
AFTER
$3.0M
–
$1,5M
$750k
$750k
Nil
Nil
* Without proper advice, the business was unable to meet the conditions to access small business CGT concessions – as such, the entire capital gain has become taxable in the hands of the company.
Without expert advice, optimal results may not be achieved. There are two very common explanations why business owners miss these generous tax concessions:
- You leave it too late to inform your advisers about your intention to sell; or
- Your advisers do not have a thorough understanding of the legislation and the possible restructuring opportunities
Selling your business for maximum net worth
You face the real chance of missing out on the generous small business capital gains tax concessions through a lack of pre-sale planning. Poor planning in this area could result in you losing potentially $1 million in legitimate tax concessions. As an example, if you currently operate out of a company (Pty Ltd) structure, you are NOT eligible for the 50% general discount on capital gains.
Timing is critical, almost all restructure options are lost once you have signed a contract, even super contributions made post contract date are invalid when looking at the $6M net asset test.
As taxation specialists, our focus is on providing the best possible outcome for business owners. For a review on how our capital gains tax solutions can help before you sell, contact us today!
Download CGT Selling a Business Fact Sheet & Questionnaire PDF
Read more: The importance of business valuation in succession planning
About our adviser: Michael Fox has been dedicated to the success of his clients, devising comprehensive wealth strategies for both personal and business growth for over 4 decades. With extensive expertise in business governance and family business succession, Michael specialises in empowering emerging businesses and family enterprises by fostering renewal, enhancing value and smooth transitions to the next generation. Please do not hesitate to reach out if you need assistance with your business valuation.
This is general advice only and does not take into account your financial circumstances, needs and objectives. The article should not be relied upon as specific information or advice without obtaining appropriate professional advice after a detailed examination of your particular situation from a qualified KMT adviser.
