Small business owners looking to sell their business must carefully consider eligibility for the small business capital gains tax (SBCGT), as it can significantly impact the after-tax proceeds of the sale.
The Australian Taxation Office (ATO) has recently indicated it has made SBCGT concessions a key focus area of review.
Here are the considerations that business owners should keep in mind when accessing the SBCGT concessions in the context of either an asset or share sale.
Who is the taxpayer?
Understanding who the taxpayer will be under either an asset or share sale is important when evaluating eligibility to access the SBCGT concession. In an asset sale, the disposing entity is typically a company, trading trust or partnership. However, in a share sale, the disposing entity can be an individual or a discretionary trust holding shares in the trading company.
Do you have an active asset?
The concept of an active asset is a key requirement under the basic conditions for accessing SBCGT concessions. An active asset broadly refers to an asset used by the taxpayer in their business operations. In an asset sale, each asset is evaluated separately to determine its active asset status. This can result in some assets being eligible for the concessions while others are not. A share sale scenario requires testing to determine if the shares themselves are considered an active asset. For shares to be considered an active asset, 80 per cent of the market value of the company’s assets must be deemed active, and the shares must meet certain holding period requirements.
Other eligibility requirements
Additional eligibility requirements apply when disposing of shares or units in a trust, including the modified active asset test, and the company in which the shares are being disposed also satisfying the maximum net asset value (MNAV) test or the CGT small business entity test. Shareholders must also be CGT concession stakeholders in the company holding the shares.
Distribution of funds
The choice between an asset or a share sale can impact the distribution of after-tax funds to business owners. For instance, in an asset sale, utilising the small business 50 per cent reduction can reduce the gross capital gain and tax liability. However, distributing the proceeds arising in the company may result in unfranked dividends to the shareholders.
In contrast, a share sale may allow for the taxpayer – in certain circumstances – to receive the proceeds from the sale tax free, by utilising a combination of SBCGT concessions.
Business owners must consider numerous factors before accessing SBCGT concessions. Careful planning and consideration of the concessions is essential for maximising after-tax proceeds and ensuring the eligibility criteria are satisfied.
This article was written by Tom Peskett, a tax consulting manager at HLB Melbourne. It was first published in Financial Times – Spring 2023.