What are your terms of sale – shares or business?
- A critical negotiation point is what you are selling – whether you are selling the business and its assets, or whether you are selling the entity which holds the business. This consideration is dependent upon many things, not the least of which is the access to the general Capital Gains Tax Discount.
- If you are selling the shares in the company, a buyer may be reluctant to take over the entity in its entirety, even with the best due diligence on their part. The buyer may have a desire to acquire the assets alone.
- Similarly the buyer may want not just the business, but you as well (especially if you are an integral part of the business success). In such circumstances it may be possible to structure a hand-over period that suits you, or retention amounts or earn-outs that meet both side’s needs.
- Each situation is different, and it may be possible for you to structure the sale to take advantage of the capital gains tax discount as well as other tax concessions, in a way that satisfies both your interests and those of your buyer.
- Whilst a company selling its business could not access the 50% cGT discount, an individual shareholder selling shares in the company could.
Company or trust
If you’re a company or trust, other than a public entity, you can also choose to disregard all or part of a capital gain where you meet all the following conditions:
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- you satisfy the basic conditions
- you satisfy the significant individual test
- you keep a written record of the amount you choose to disregard (the exempt amount) and, if there is more than one CGT concession stakeholder, each stakeholder’s percentage of the exempt amount (one may be nil, but together they must add up to 100%)
- you make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual’s percentage of the exempt amount
- the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and
- where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession (up to the asset’s CGT exempt amount). If your capital proceeds from the disposal of a CGT asset are increased by one or more financial benefits that you receive under a look-through earnout right relating to that CGT disposal, you are treated as receiving those capital proceeds in instalments.
The SBC’s apply to reduce a capital gain made on the sale of an “active asset”. There are four SBC’s:
- The 15 year exemption – A capital gain made on the disposal of an active asset that a taxpayer has owned for at least 15 years is fully tax-exempt if the taxpayer or, where the taxpayer is a company or a trust, a significant individual of the taxpayer is at least 55 years of age and retiring when the sale occurs, or is permanently incapacitated. The company pays this amount to the individual tax free.
- The 50% active asset reduction – A capital gain from the sale of an active asset is reduced by 50% (after applying capital losses and the CGT general discount if applicable). The company must pay this amount to the individual tax free.
- Small business retirement exemption – Any remaining capital gain (after applying capital losses, the CGT general discount and/or the Active Asset Reduction if applicable) made on the sale of an active asset, up to a lifetime limit of $500,000 for each individual is disregarded if certain conditions are met. If the taxpayer is less than 55 years old then the funds need to be put into Super otherwise this gets paid to the individual.
- Small business rollover – All or part of a capital gain made from the sale of an active asset can be deferred (after first applying any capital losses, the CGT general discount, the Active Asset Reduction and/or the retirement exemption if applicable) for at least two years.
Active Asset
- A CGT asset will satisfy the active asset test if the asset was an active asset for at least half the period the asset was owned or at least 7.5years if the asset was owned for more than 15 years.
- The definition of an active asset is set out in s52-40 which provides that a CGT asset owned by a taxpayer is an active asset at a particular time if it is used in a business carried on by the taxpayer or by an entity that is an affiliate of the taxpayer.
- Intangible assets (e.g. Goodwill) are active assets if they are inherently connected with the business. Shares or interests held in a resident company or trust may also qualify as an active asset, if the market value of the entity’s active assets is at least 80% of the market value of all the assets of the entity.
- The taxpayer satisfies either the small business entity test or the $6 million maximum net asset value test.
Superannuation consequences
From 1 July 2007, if you’re contributing a retirement exemption amount to a super fund or RSA, the amount is generally a non-concessional contribution. To exclude the amount from your non-concessional contributions cap and have it count towards your CGT cap amount instead ($1,415,000 for 2016–17), you must notify the fund using the Capital gains tax cap election. You must complete this form by no later than the time you make the contribution.
Getting funds out of the company
- Payments of a 15 year exemption are not deemed dividends under s.47 and are not included in capital proceeds. These amounts are paid out tax free prior to deregistration.
- Payments made pursuant to the retirement exemption are also not deemed dividends under s.47.
- Retained earnings are deemed dividends.
- A company can distribute the CGT exempt amount by:
- Paying a dividend (this is generally unfranked as it has not borne company tax)
- Liquidate the company – The cancellation of the shares will trigger CGT and the payment received by the shareholder in lieu of the active asset amount will constitute capital proceeds. TD 2001/14 Capital gain from this is reduced by the 50% discount and the SBC’s