Capital Gains on Sale of business
The sale and purchase of a business will raise a wide range of tax considerations, depending on the nature and value of the business’s assets, when they were acquired, and the circumstances of the specific seller and buyer. The tax consequences will differ depending on whether the sale is structured as a transfer of assets used to operate the business or a sale of securities in the company, and how the transaction is structured will be negotiated.
The effect on a seller who has access to the “CGT discount”
Gains or losses on the sale of shares are generally capital gains or losses, unless the seller is a share trader or acquired the shares in the ordinary course of business or as part of a profit-making undertaking or scheme. If the owner of the shares is a taxpayer eligible for the CGT discount (which, for example, reduces the taxable capital gain by 50% in the case of individuals), Because of the potential scale of tax savings, this classification has the potential to be very significant in terms of income tax consequences.
The ability to take advantage of the CGT discount is likely to be the most important tax “influencer” in the sale of a business. As a result, where the CGT discount is potentially available, business sellers will almost always seek to sell shares rather than have their company sell the business assets.
Other CGT concessions’ impact: small business CGT concessions
In some cases, the sale of a company’s shares or the sale of a business by a company may qualify for one or more CGT concessions aimed at small business owners, particularly (but not exclusively) those nearing retirement.
Characteristics of gains and losses
The nature of gains or losses resulting from asset disposal will generally be determined by reference to the role or function of the specific assets in the operation of the business. Thus, plant and equipment used in the business, as well as goodwill, are generally considered to be capital assets of the business. However, a capital characterization can potentially be overridden (at least with respect to assets other than some depreciating assets that can never be expected to be sold for a profit) if the owner of the business acquired the assets used in the business for the purpose of profit-making by sale (though this would not be the conventional case).
Seller preferences where no CGT concessions or exemptions are available
There will be many instances where a seller will be unable to take advantage of the CGT discount, small business CGT concessions, or non-resident CGT exemption. This could be because the transaction is unlikely to be completed through the sale of shares by an individual, trust, or superannuation fund, or because the basic conditions for small business CGT concessions are not met.
The most common scenario in this regard is when an Australian company chooses whether to sell shares in a subsidiary or have the subsidiary sell its assets. While the CGT discount and non-resident CGT considerations are generally inapplicable in such cases, the differences in treatment between a share sale and an asset sale can still influence taxpayer behavior. For example, if a seller has capital losses that it may not be able to use otherwise, it would generally prefer the sale option that maximizes taxable capital gains over revenue gains.
- Where the difference is a “timing” difference (for example, due to tax depreciation), it will normally not have a decisive impact on the decision whether to sell assets or shares; and
- Where the difference is permanent (e.g., because the seller originally acquired the shares from another party for a price well in excess of the underlying tax basis of the company’s assets), it will normally have a strong influence on the choice.