How much will you profit from the sale of your business after your tax obligations are met?

As another financial year draws to a close you may be contemplating the tax you will be required to pay if you sell your business. The amount you keep after tax is the most meaningful figure to gauge your return from selling.

Whatever your situation, one thing is certain… it’s too late to decide to reduce the amount of tax you will pay when you have already closed the deal on your business exit.

The only way to ensure that you maximize your net outcome is with professional tax planning advice on how to improve your business sale outcome - prior to the sale. By taking timely advice you may be able to overcome some aspects of your situation that would otherwise add to your tax burden.

Here’s an example of a situation where timely tax advice from a qualified professional could have made a big difference to the outcome for the business owner:

Case Study – Steve Prepares To Sell His Business

Steve aged 58 (not his real name), owned all of the shares in an Australian company, Build-Up Holdings Pty Limited (not the real company name) that he had started from scratch 8 years previously.

Steve received an offer to buy the business for $5 million. Assume for this example that the basic eligibility conditions apply for the small business Capital Gains Tax (CGT) concessions (you can read Chapter 16 of “Your Business Succession” for the eligibility criteria for Australian CGT concessions).

Without tax advice prior to the sale, this is how the sale of business assets would be treated for Australian tax purposes in 2010:
If the company sold the business, then the capital gain of $5 million would be taxed in the following way:

• An amount of $2.5 million is exempt under the small business CGT 50% discount. Note that this amount would effectively be unfranked and would need to be fully taxed in Steve’s hands upon distribution.  This is because the tax relief is received by the company and not by Steve.
• An amount of $500,000 would be exempt under the CGT retirement exemption, but for this to apply, the CGT exempt amount would need to be paid to Steve.  As he is aged 55 or over he could choose to either cash out or contribute the relevant amount to a complying superannuation fund, but if Steve was under 55 years of age this amount would need to be contributed to a complying superannuation fund.
• Given that the funds going into superannuation would be the result of a capital gain from the sale of a business, no portion would be tax deductible and the entire amount would be deemed to be a personal contribution. Note that this amount (being from the sale of a business) would not count toward the current Australian contribution caps.
• The balance of $2,000,000 would be a taxable capital gain to the company, which at current company rates of 30%, would be approximately $600,000 (disregarding other possible personal deductions and the Medicare Levy).

In contrast let’s look at the options for Steve if he had sought taxation advice prior to agreeing to the sale.

Business Exit Strategy 1

• Steve, a married person, could re-structure his business (prior to the sale) to allow his wife some ownership.  By doing so, she would also be eligible for tax exemptions as a CGT concession stakeholder, thereby broadening the tax relief possibilities.
• There may be some costs involved with the transfer of ownership (depending upon the state in which the business operated), so this would need to be factored in to consider whether the strategy would be financially viable.
• In addition, Steve would need to consider the CGT impact of transferring partial business ownership which could further impact the viability of the strategy.
• However, what is important to note here is that by Steve arranging this strategy, he could potentially save tax of approximately $150,000 on the sale of the business.

Business Exit Strategy 2

Steve could also sell shares in the company rather than selling the business.
This strategy, compared to selling the business, would dramatically reduce the capital gains tax he would pay on the $5 million received from the sale, because he would benefit from the full personal CGT relief in his hands, rather than being retained within the company.  Here’s how it would work:

• $2.5 million would be exempt under the general CGT 50% discount.
• $500,000 would be exempt under the CGT small business 50% discount.
• $500,000 would be exempt under the CGT retirement exemption.
• That means, in this example, $3.5 million would be exempt from tax and $1.5 million would be assessable at personal marginal tax rates of 45%. Using the Australian 2009/2010 tax tables (disregarding other possible income earned, personal deductions and the Medicare Levy), tax payable would be approximately $178,000 (which compared to the scenario before any advice, is a potential tax saving of $422,000).  This could possibly be reduced further by combining Strategy 1 and Strategy 2 to allow his wife some ownership of shares.
• One possible complication of this strategy may be in finding a buyer who would be willing to purchase under this arrangement. From a purchaser’s perspective, buying shares in the company would involve the need for a thorough due diligence process in order to:

• Clarify the company situation
• Identify liabilities such as the general tax position
• Examine exposure to debt and guarantees, potential for losses, and other liabilities etc.

No Two Business Exits Are The Same

It is important for you to realize that no two situations will be the same and circumstances of each individual case will be impacted differently by these strategies.  However, there is no doubt that, planning well prior to your business sale, by seeking professional tax planning advice from an expert who understands the tax implications of selling your business, can put a lot more profit in your pocket after the sale.

If you would like to know more about how you can position your business for a more profitable exit, call us on (03) 9553 7173  or 1300 499 225, or email us from the ‘contact’ page of this website.

Here’s to your profitable business exit!
Leigh Riley

DISCLAIMER: Important information
This publication has been prepared to provide you with general information only and is subject to change. There is no guarantee that the forecasts or Tax Calculations will come to pass and this is not intended to take the place of professional advice.  You should not take action on specific issues in reliance on this information, as the author did not take into account the business objectives, financial situation or particular needs of any particular person.  Before making a business or investment decision, you need to consider (with or without the assistance of an advisor) whether this information is appropriate to your needs, objectives and circumstances.  This Report has been prepared based on the author’s understanding of current Australian tax rules and market conditions.  No responsibility can be taken for any person or business situation relying on this information and the author takes no responsibility for legislative changes that impact upon the accuracy of this information.
9 June 2010

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