Tax implications when buying or selling a business in Australia

Buying or selling a business in Australia is one of the biggest financial decisions. Thus, it is imperative to carefully understand and evaluate potential tax implications to prevent lawsuits or penalties. Those who are selling their business have to pay taxes and receive the payment as part of their business income. They are liable to pay CGT and other taxes depending on their business structure.

Tax implications are equally important for potential buyers because they directly impact the actual cost of acquisition, depreciation benefits, future tax liabilities and return on investment. In simple terms, Australian tax laws have specific provisions and regulations for the sale and purchase of businesses, which help determine how much ends up in your pocket while ensuring a seamless transition.

Worry not! This article unveils the key tax implications involved in buying and selling a business in Australia. It covers everything, ranging from Capital Gain Taxes and GST to asset sale vs share sale and stamp duty and state territory taxes. If you are looking for an established business for sale in the Gold Coast, consider proper due diligence to make the most of your investment decision.

Let’s Get Started!

1. Understanding the Capital Gain Tax (CGT)

Capital Gains Tax (CGT) is a tax imposed on the profit you generate on the sale of a business asset, such as goodwill, commercial premises, trading stock and intellectual property. In short, if you sell your organisation above its original cost, the amount of the gap is known as a capital gain, and tax is levied on it. However, it is based on the following factors:

• Holding Period: If you have owned the plant, equipment or other asset for 10 months, then you are eligible for a 50% discount on the CG. For instance, if you sell your business for $500,000 and your capital gain is $150,000, you would only pay CGT on $75,000, assuming you receive a 50 per cent discount.

• Business Structure: If you have a sole trading business, the capital gain is directly added to your personal income and calculated based on your personal income tax rate. If you have a company, the company is itself liable to pay tax on capital gain at the pre determined company tax rate.

• Cost Base: It is the actual price you invested to buy the asset + any expenses related to acquiring or selling it. A higher cost base can reduce your capital gain, which in turn reduces your potential CGT liability.

Remember that the way assets are allocated and valued under the sale contract can significantly affect the taxable gain and the Buyer's tax deductions in the future. Thus, it is essential for buyers to understand the cost base when buying a lucrative business for sale in Gold Coast, QLD.

2. Goods and Services Tax or GST

Goods and Services Tax (GST) is a value added tax of 10% on the sale of goods and services in Australia. When putting your business on sale, the GST payable depends on the settlement terms mentioned in the sale agreement. What does that mean?

When a business is sold as a going concern, it includes all the necessary tools, seamless operations, intellectual property, stock, etc, for continued operations under new ownership. The process involves the transfer of all assets and relevant contracts, and licences. Under this, the sale can be GST free, but strict conditions apply. Both parties (the Buyer and the seller) must be registered for GST to leverage this benefit.

However, if pre determined conditions aren’t met, GST at 10 per cent may be payable on taxable assets included in the sale price. In many cases, sellers sell only a portion of business assets instead of the entire business. Under this, GST would be levied on individual assets.

Therefore, it is important for sellers to clearly record in the sale contract that the transaction is a ‘sale of a going concern, to enjoy tax benefits. Buyers must check it thoroughly to avoid unexpected GST liabilities.

3. Small Business CGT Concessions to Look For

Believe it or not! The Australian tax system offers attractive CGT concessions for small scale businesses. This can easily reduce or even eliminate CGT. However, you need to meet the strict eligibility criteria under the ATO rules. There are up to four CGT concessions that can help reduce your tax liability or even remove Capital Gain Tax on the sale of business assets. These include:

• The 50% Active Asset Reduction: It provides a huge discount on CGT when selling an ‘active asset’ to the new owner. This includes equipment, vehicles and machinery as well as intangible assets like goodwill. Ensure the asset must have been used in the business for at least 12 months before the sale to gain 50% active asset reduction.

• Retirement Exemption: It allows eligible small business owners in Australia to exempt up to $500,000 of capital gains from tax when selling their business. Your age must be at least 55 years or above at the time of the sale to leverage this benefit. If you are under 55, you can contribute the exempt amount to your superannuation fund for future savings.

• 15Year Exemption: You must have owned the business asset for at least 15 years until the sale of your business or you must be at least 55 years old or retiring to avail this concession.

4. Stamp Duty (transfer duty) is payable by the Buyer

In Queensland, stamp duty applies when buying a business for sale in Gold Coast, Brisbane, Townsville and other regional areas. It is paid when the sale includes tangible assets, like equipment, goodwill and furniture. The duty is calculated on the dutiable value of the business assets being transferred. There is no denying that the Buyer is responsible for this tax implication; they can still leverage concessions or exemptions in certain cases. Ensure you get a proper valuation of assets and hire an expert to precisely calculate the duty in compliance with QLD's Office of State Revenue regulations.

5. Employee Obligations

If the sale includes employees, then employers must manage pay, outstanding wages, final pay, leave payouts and superannuation to prevent lawsuits. When selling your business, you must comply with employee obligations. Unfortunately, buyers may inherit certain employee liabilities, leading to losses and financial instability. Thus, it is good to conduct thorough due diligence before buying any business. Tax implications include reporting superannuation, payroll tax and PAYG withholding obligations to prevent penalties during the business acquisition.

6. Other Important Tax Implications

Both buyers and sellers can focus on key tax considerations to avoid penalties while saving extra for a higher ROI.

- Depreciating Assets:

When selling assets like plant and equipment that have depreciated values, there may be implications for your income tax returns. From a buyer's viewpoint, depreciating assets can offer excellent tax deductions in the form of depreciation claims when buying a business for sale in the Gold Coast.

- Trading Stock:

Evaluating the closing stock precisely at settlement can benefit both parties, saving huge tax bills.

- Prepayments:

If the seller received prepayments for services or goods, these should be included in their income tax return. On the other hand, buyers must be aware of prepayments, as these can impact cash flow and tax obligations.

Wrapping Up

Driven individuals preparing to sell or buy a business in Australia must be aware of tax implications and legal requirements to prevent penalties. They can take assistance from professional lawyers and accountants to understand GST, CGT, concessions, employee obligations, and find ways to reduce tax bills to enjoy a solid return on investment.