Will I pay tax when I sell my business?.

Revenue assets and capital assets.

The tax turns first on the kind of asset. Revenue assets, broadly trading stock, plant and equipment, are taxed as income. A gain over the written-down value of plant is taxed as ordinary income, while selling below the written-down value gives a deduction, and trading stock and work in progress have their own treatment again. Capital assets, such as goodwill and contractual rights, fall under the capital gains tax rules, and goodwill is usually where most of the price, and most of the gain, lands.

The relief that can apply, and the timing lever.

For capital gains there are two layers of relief that matter. A general discount can apply to assets held long enough by the right kind of taxpayer, and the small business CGT concessions in the Income Tax Assessment Act 1997 can reduce the gain further, in the best case to nothing. There is a bias worth knowing about: the general discount is not available to a company, which pushes against holding assets likely to produce a capital gain inside a company. There is also a timing lever, because for capital gains the clock runs from the date of the contract, not settlement, so signing a few days either side of the end of a financial year can move the tax by a whole year.

Why planning comes first.

This is where pre-sale planning earns its keep, and where the lawyer and the accountant work together. The way the ownership of the business is structured, and the way the contract apportions the price across goodwill, plant, stock, licences and any restraint, can make a large difference to what you keep. We work alongside your accountant on the sale and on business structuring, and run the transaction through our business sale and purchase service.

Law referenced: Income Tax Assessment Act 1997, Divisions 115 and 152.