There are many factors you need to consider when deciding when is the right time to sell your business. Obvious factors such as market conditions play a huge role in determining the gross sale value. Unfortunately too many people forget and, therefore, do not effectively plan for the taxation implications which can massively affect the net amount you end up with in your hand.

Selling your business should never be a spur of the moment decision. If you are correctly structured, a husband and wife team can effectively take $4,000,000 capital gains tax free from the sale of your small business.

CGT concessions: The two main concessions are the CGT discount and the small business CGT concessions. In claiming either of these concessions, it is important to realise that certain conditions must be met.

1. The 50% CGT discount is only available to assets owned, for more than 12 months, by individuals, trusts and superannuation funds. Unfortunately, if an asset is owned by a company, it will not be eligible for the CGT discount no matter how long the company has owned it.

2. The remaining 50% of the capital gain can also be received tax-free by utilising the active asset reduction and the retirement exemption, if the asset is a business asset and subject to complying with certain conditions.

If you currently fall outside the above conditions all hope is not lost. Depending on the timing of the sale there are restructures that can bring you within the CGT concessions framework. If you are thinking about selling your business, please seek specialist legal advice at least 18 months before you are ready to sell.

Let’s look at the following examples:

Operating from a business - Neil and Natalie carry on a small motel business at Rockhampton. They purchased the business including land 10 years ago for $500,000 in a company. As part of their retirement plan, they are thinking of selling in the next few years. This disposal (sale) of the business will incur a $4 million capital gain, based on the current market value of the land being $4,300,000 and the business valued at $200,000.

Capital gain: $4,000,000

Less:

Discount Gain: 0

Active Asset Reduction (25%) $2,000,000

Retirement Exemption: $1,000,000

Taxable Amount $1,000,000

As Neil and Natalie hold the business and property in a company they straight away miss out on the 50% CGT discount. Their retirement fund has automatically lost a minimum of $300,000 considering the corporate rate of tax is 30%. The real figure is more likely to be $465,000 once they have exacted the money from the business into their hands (assuming the top marginal rate of tax).

On the bright side they are able to apply the active asset reduction, reducing the capital gain by 50% and claim the retirement exemption (2 x $500,000). As they are over 55 years of age, they are not required to place any moneys into a superannuation fund and, incidentally, it is not necessary for them to retire. If one or both of Neil and Natalie were under 55, then variations to the allocation of sale proceeds can be made but this requires the amount of the retirement exemption claimed to be rolled over into a superannuation fund.

Operating from a trust - Instead of using a company to purchase the business and land in 10 years ago Neil and Natalie used a discretionary (family) trust. As mentioned above a trust is eligible for the all CGT concessions. Neil and Natalie are now able to access the 50% general discount and by using a trust they have not affected their rights to access the small business concessions

Capital gain: $4,000,000

Less:

Discount Gain: $2,000,000

Active Asset Reduction (25%) $1,000,000

Retirement Exemption: $1,000,000

Taxable Amount Nil

In this scenario Neil and Natalie can sell the motel and land ownership without paying any CGT on the sale.

Answer to the million dollar question, What can Neil and Natalie do if they are trading in a company?

As Neil and Natalie are not looking at selling the business for a few years, time is on their side. In many cases with specialist advice it is possible to restructure out of a company into a trust environment without incurring a CGT or stamp duty liability. Also if the capital gain was larger than the $4,000,000 as displayed in these examples further reductions may be accessed via the retirement exemption with additional CGT concession stakeholders meeting the requirements. (This option is only available with properly structured trusts; it is not available for company, partnership or individual ownership.)

Timing is critical you should have your current structure reviews at least 24 months pre-sale.

Effective CGT planning can have a massive impact on the net value your receive for your business. For all business owners, it is critical that you receive expert advice, the legislation covering the CGT concessions is complex and requires specialist interpretation.

Unfortunately, we have seen quite of few business owners who have missed out on these generous concessions either through not seeking advice pre-sale or using a generalist practitioner for their sale. There really should be no excuse to miss out on money that is rightfully yours.

Paul Olds
Cleary Hoare Solicitors