Part 2: Taxation
A key objective in any business sale transaction is to structure the arrangements to optimise the seller’s after-tax position. To ensure you are minimising the amount of tax payable on the sale of your business, you should complete the following, prior to entering the sale process:
- Consider in detail, the ‘tax history’ of the business / structure to determine whether they are ‘pre-capital gains tax (CGT) assets (and not subject to CGT) or post-CGT assets (and subject to CGT);
- Determine the most tax effective legal form of the sale (e.g. sale of business assets or sale of shares) to achieve the best tax outcomes and quantify ‘upfront’, the anticipated tax savings;
- Establish the seller’s ability to access one or more capital gains tax (CGT) reliefs (e.g. CGT small business concessions and rollovers) that may be available; and
- Prepare detailed tax computations to accurately determine the net after-tax cash position of the ultimate business owners, from the preferred sale route.
The importance of having a clear ‘upfront’ understanding of how the sale transaction should be structured from a tax perspective cannot be underestimated. It’s fair to say that many people still lose sight of the fact that getting a business ‘sale ready’ includes accurately determining the tax consequences before transacting.
Many sellers are unaware of the potential to sell at entity level and more often than not, this sale route can result in better tax outcome for them, because of the ability to access one or more of the CGT reliefs. On the buyer’s side, there is often a reluctance to acquire an entity and this is primarily based on concern of inheriting liabilities. This can be mitigated by a thorough due diligence and by obtaining appropriate warranties from the seller.
For buyers, a transfer duty liability is normally triggered if business assets are acquired. Conversely, with the acquisition of shares in a company, transfer duty does not apply provided the market value of any land held by the company is less than $2 million. Obviously, these factors will influence the buyer in negotiating the sale price and the sale arrangements as a whole.
From a practical perspective, the transfer duty that would otherwise be payable (by the buyer) on the acquisition of business assets can be invested in the due diligence and appropriate advice. Often, these costs are less than the buyer’s potential transfer duty liability. This, combined with the fact that the seller will generally have a better tax outcome from an entity sale, means that a ‘win-win’ outcome can be achieved for both seller and buyer.
To achieve the best possible outcome the seller, should undertake these steps prior to sale, ensuring that:
- the seller can negotiate with potential purchasers from a position of strength, with confidence that their preferred sale route results in their position being optimised;
- the sellers are fully aware of the tax cost associated with the sale and with advance knowledge of their net cash position after sale; and
- should specific actions be required or processes implemented to access the sale proceeds in a tax effective manner, these steps are taken.
If you would like to have further information on how to prepare your business for sale, please contact us on 08 9481 1448.