That could be the difference between retiring in LUXURY or wallowing in self-pity and REGRET!
Many business owners aren’t aware, or choose not to think about the fact, that when the time comes to sell their business, the sale is in the first instance subject to capital gains tax (CGT).
However, the good news is that there are a number of concessions you may be eligible for, which can make a sizeable difference to the sum you receive in return for your life’s work.
In fact, these concessions can often be the difference between retiring in luxury and wallowing in regret!
Let’s break that down…
Here is a simple, but realistic and plausible example of what can happen during the sale of a business.
- You started your business from scratch and grew it completely organically (ie. you haven’t bought other businesses and bolted them on to yours in order to achieve your growth).
- This means almost certainly you have no ‘cost base’ for CGT purposes (ie. whatever you sell your business for is all profit because you haven’t incurred any non-deductible costs to set it up in the first place nor throughout its life).
- You then sell your business for $1 million (plus stock/work in progress).
- If you don’t qualify for the concessions it is entirely possible that you could pay as much as $485,000 in tax on that potentially life-defining transaction. This means you are left with $515,000. That’s a nice amount of money, for sure. But as an exchange for your life’s work, and potentially as the bulk of your wealth to fund the remainder of your life, for most people it will simply not be enough. And the reality is for the majority of us, this won’t be sufficiently life-changing nor would we consider it enough to achieve our real long-term wealth goals.
- However, if you do qualify for the concessions, and you sell your business for $1 million, you could quite potentially pay absolutely no tax at all. Nil! Leaving you with a cool $1 million in the bank.
Now just imagine for a moment how you would feel if you fell into the first category, and then found out you ‘could have’ been in the second through some proactive planning and monitoring from your accountant. You can feel the anxiety and regret already, can’t you?
Think we are being dramatic?
We were recently engaged by a new client who had sold their business for something in the vicinity of $500,000 during the 2018 tax year.
Their previous accountant knew they were preparing for a sale, yet failed to provide them with the proactive advice they so desperately needed.
After the sale of the business and while preparing to start another, the client came across to CapitalQ and engaged us to prepare their taxes. Upon doing so, we were placed in the unenviable position of having to advise that they do not qualify for any of the small business CGT concessions. Therefore, the client has been left with a resulting tax bill on the sale of their business of around $170,000! We have also had to advise them that had we been involved in their affairs in the lead up to the sale, we almost certainly could have assisted them to make proactive adjustments within their affairs, which would have allowed them to qualify for the concessions and would have almost certainly allowed them to pay no tax at all on the event. So, as you can see, getting this wrong and missing out is very real.
Just to clarify, this is not a loophole. These are legitimate concessions for small business owners, provided in recognition of small business owners’ contribution to the Australian economy and as incentive to invest, to innovate and to bear the risks associated with undertaking a business enterprise. They are concessions which can significantly reduce your tax obligations – if you qualify. However, qualifying isn’t always easy, and it can often be a moving target. It is very possible you might qualify today but come next year when you actually decide to sell, you may not.
A simplified summary of the initial tests to qualify is as follows:
Test 1 –
- Your business has an annual turnover of no more than $2 million, or
- You have net assets of less than $6 million.
Test 2 –
- The asset you are selling must be an ‘active’ asset (meaning it is used in the course of carrying on a business or if it is an intangible asset (such as goodwill) it is inherently connected with a business you carry on).
If you pass both initial tests, then making further investigations into the rest of the legislative requirements is well worth undertaking.
As stated, this is a simplification of the initial steps to qualify and does not cover all scenarios. There are further tests and requirements that will need to be met depending on your circumstances. Further, the small business CGT concessions actually consist of four separate concessions, each with its own additional qualification requirements.
If you plan to sell your business now or anytime in the future (which absolutely should be part of your planning, because a business that can be sold, is a business that will allow you to achieve your goals, even if you don’t actually decide to sell), we highly recommend you seek advice from an accountant well experienced in the application of the concessions.
Your ability to qualify starts with your business structure, and then with its ongoing management at all times keeping in mind the concessions and avoiding the traps that might ultimately result in a failure to qualify.
The accountant you see should also have experience taking on the ATO in the event they disagree with a taxpayer’s view of their entitlement to the concessions.
Take it from us, going up against the tax office is no small feat – and it pays to have someone in your corner who knows their stuff.