Do You Pay Capital Gains Tax On Sale Of Business
Selling a business is a significant milestone for owners, whether you’re planning to move on to new ventures, retiring, or simply taking a well-earned break. However, amidst the excitement of closing a deal, one crucial consideration often catches business owners off guard: Capital Gains Tax (CGT). Understanding how CGT works when selling a business in Australia can help you plan strategically, maximise any concessions available to you, and avoid unexpected tax bills.
What is Capital Gains Tax (CGT)?
Capital Gains Tax is a tax you pay on the profit (otherwise known as your capital gain) made when selling certain assets. These could include property, shares, and business interests. In Australia, CGT isn’t a separate tax, so it forms part of your income tax instead. Your capital gain will be added to your assessable income and taxed at a marginal rate.
A capital gain occurs when the sale price of an asset exceeds its purchase cost, as well as any costs of acquiring it, storing it, and getting rid of it. You can also make a capital loss when your selling price is lower than your purchase price. If you earn a capital loss, you can use this in the future to offset other capital gains.
Do you pay capital gains tax when selling a business?
In most cases, selling a business in Australia requires you to pay capital gains tax. However, how much you owe will depend on a number of factors, such as:
- Your business’s structure, such as sole trader, partnership, company, or trust
- The nature of assets being sold, e.g. shares, goodwill, or property
- How long the business has been held
- Whether any small business CGT concessions apply
The Australian Taxation Office (ATO) applies CGT when you get rid of certain assets such as goodwill, business premises, intellectual property, and shares in a private company. You might be able to receive some relief on your CGT through exclusions and concessions – especially if you’re a small business owner who meets the relevant eligibility criteria.
What assets do you need to pay Capital Gains Tax on?
When selling a business, CGT can be calculated on the assets you still possess. While it depends on your specific business as to what you’ll need to pay CGT for, here are the most common assets it generally applies to:
- Goodwill, otherwise known as the intangible value given to your brand, reputation, or customer relationships
- Business premises, if owned by you or your business entity
- Plant and equipment when sold for more than their written-down value
- Intellectual property, such as licences, trademarks, and patents
- Shares in a private company
When selling your business, it’s just as important to know what assets are exempt from CGT as what are included. Things like your inventory, depreciating assets used only for tax purposes, and certain personal-use assets don’t need to be taxed.
How is Capital Gains Tax calculated on a business sale?
There are several steps required to work out the CGT you’ll need to pay on your business’s sale price. We’ve detailed these below for your convenience:
1. Work out your capital proceeds
Unless you’re selling your business under extenuating circumstances, the capital proceeds are usually the sale price you receive for the business assets. This includes everything paid for within the business, including cash from the settlement, the market value of any non-cash benefits (like shares or other property), and assumed liabilities if the buyer has agreed to take over the business’s debt.
When selling multiple assets within the business, each individual sale price should be itemised in the contract. This is because CGT can apply differently to specific assets, so itemising them makes it easier to calculate.
2. Subtract the asset’s cost base
Your asset cost base includes the original purchase price plus any costs associated with acquisitions, improvements, and disposals. For business assets, these might include things like:
- The purchase price of the asset
- legal and professional fees
- Stamp duty
- Registration fees
- Costs of improvements
- Selling expenses, such as advertising
It’s incredibly important to maintain accurate records of these costs, as they can directly reduce how much capital gains tax you need to pay.
3. Calculate the capital gain or loss
To calculate your capital gain or loss, simply subtract the asset’s cost base from the capital proceeds. Here’s the formula to use:
Capital proceeds – cost base = capital gain (or loss)
4. Apply any available discounts or concessions
You’ll need to include your capital gain in your taxable income, but make sure you apply for any available discounts beforehand! In Australia, there are several CGT concessions that you might be eligible for:
- 50% CGT discount
- Small business CGT concessions, such as the 15-year exemption, 50% active asset reduction, rollover relief, and more
If you can apply for both the 50% discount and small business CGT concessions, you should be able to reduce your taxable capital gain by an impressive amount.
5. Add the net capital gain to your assessable income
Once you’ve applied for any discounts or concessions you’re eligible for, the remaining net capital gain will need to be added to your assessable income for the financial year. This will then be taxed at your applicable marginal tax rate.
For example, if your final taxable capital gain is $50,000 and your marginal tax rate is 32.5%, your tax liability on your gain would be $16,250.
Key tax reliefs and exemptions available in Australia
Tax reliefs and exceptions can save you lots of money when used correctly, so it’s important that you know exactly what you can apply for. The Australian tax system offers several valuable concessions to reduce the CGT liability when selling your business, especially for small business owners.
Small Business CGT Concessions
If your business has an aggregated annual turnover of less than $2 million or net assets under $6 million, you might be eligible for several small business CGT concessions. These include:
- 15-Year Exemption: You won’t have to pay any CGT if you’ve owned the business asset for at least 15 years, are aged 55 or over, and are retiring
- 50% Active Asset Reduction: This can reduce your capital gain tax by 50% on active business assets
- Retirement Exemption: You can get up to $500,000 of capital gain exempted if you’re using the proceeds for retirement (there are special provisions in place for owners under 55 years)
- Rollover Relief: This concession defers your capital gain if you acquire a replacement active asset within two years
You can combine these concessions in a number of different ways to significantly reduce or even eliminate CGT altogether. Enlisting the help of a professional business valuer can help you make sure you’re maximising your savings through these exemptions.
50% CGT Discount
If you’ve owned your business asset for more than 12 months, individuals, trusts, and complying superannuation funds can have a 50% CGT discount applied to their capital gain. Apply this before including it in your taxable income to benefit from the discount.
For example, if you sell your business premises at a $200,000 capital gain and meet the criteria for the 50% CGT discount, your taxable capital gain would be $100,000.
Small Business Rollover Relief
When reinvesting the proceeds of your current sale into another business, you might be able to apply for rollover relief. This is for owners who acquire an active asset within two years, and if you choose to sell the replacement asset at a later date, the deferred gain will be triggered then.
This concession is very helpful for owners looking to upgrade equipment, relocate premises, or transition into a new venture without an immediate tax burden.
What happens if you sell a business at a loss?
If the capital proceeds from selling your business asset are less than its cost base, you’ll make a capital loss. However, while this isn’t the outcome you were most likely hoping for, you still have the potential to turn it around and spin it into a positive. Even though a capital loss can’t be used to reduce your taxable income directly, you can still:
- Offset it against other capital gains in the same financial year, or
- Carry it forward to offset future capital gains indefinitely
Your capital loss can’t be used against regular income, such as salaries or business profits. To avoid making a loss, we highly recommend getting in touch with a valuation expert who can help you condition your business before a sale to boost its value and overall price.
Tax planning tips before selling your business
Selling a business can be tricky, so making sure you’re proactively planning for your taxes is essential. If you’re concerned about how to tax plan ahead of selling your business, here are some of our tried and true tips to get you through it:
- Get professional tax advice early: Working with a tax agent or advisor well before initiating a sale is the best way to make sure everything goes smoothly with as little stress possible
- Time the sale strategically: Holding assets for at least 12 months can secure a 50% CGT discount, so if you don’t have a strict deadline and are coming up to this milestone, see if you can hold off for a while longer
- Consider selling assets separately: Selling goodwill and property separately can optimise tax outcomes, so consider planning your strategy beforehand to avoid missing out on savings
- Maximise eligible deductions and concessions: Review your eligibility for small business concessions and apply to any that you think you’re suitable for to reduce CGT
- Keep thorough records: Make sure your purchase costs, improvement expenses, and selling costs are documented so you have a paper trail in case you need to prove your eligibility for tax concessions
Common mistakes to avoid
Many business owners make the mistake of unintentionally increasing their tax liability by making common mistakes. To make sure you’re not paying any more than you have to, here are some things to look out for:
- Don’t assume all sale proceeds are classed as income: Make sure you understand the difference between capital gains and business income so you’re not declaring the wrong amount of taxable income
- Overlooking small business CGT concessions: As we’ve shown above, CGT concessions can greatly reduce your tax bill
- Failing to factor in the 12-month rule: Selling before the asset is held for a year means you won’t be eligible for the 50% discount concession
- Missing deadlines for rollover relief: Replacement assets must be acquired within two years for you to be able to keep your rollover relief, otherwise, the deferred capital will crystallise and become taxable
- Not seeking advice early enough: Last-minute tax planning often leaves you rushing and missing valuable information and concessions to save you money
FAQs
Do I have to pay CGT immediately after selling a business?
No. CGT is reported in your tax return for the financial year in which your sale occurs, so any tax payable is due with your income tax assessment. However, if you’d prefer to pay early, you can make a lump sum payment towards your final CGT amount.
Is selling goodwill taxable?
Yes, goodwill is considered an active business asset and therefore should be included in your CGT calculations, unless relevant concessions apply to exempt it.
What if my business is operated through a company?
Companies still need to pay CGT on asset sales, and there are a few concessions you can utilise to lower your final bill. However, companies aren’t eligible for the 50% CGT discount, as this is only available to individuals and trusts, so you may find your bill higher than if you were to operate your business through a different structure.
Get in touch with a business valuation expert near you
Selling a business is one of the most important financial decisions you’ll make. To accurately assess your business’s value, understand tax implications, and maximise your returns, we highly recommend consulting a professional. Our experienced business valuation and tax advisory partners across Australia can guide you through the process from start to finish.
We have business valuation experts across Australia, and you can get in touch with them by following the details below:
- Get in touch with our business valuation experts in Brisbane
- Get in touch with our business valuation experts in Sydney
- Get in touch with our business valuation experts in Melbourne
- Get in touch with our business valuation experts in Perth
- Get in touch with our business valuation experts in Adelaide
- Get in touch with our business valuation experts on the Gold Coast
- Get in touch with our business valuation experts on the Sunshine Coast
