Changing, selling or closing your business – things to consider
Here we cover the most common topics you need to consider when changing, selling or closing a business. While it's a great starting point, we recommend you also seek advice from your tax adviser.
Find out about:
GST
Cancelling your GST registration
If you permanently close your business, you must apply to cancel your goods and services (GST) registration within 21 days of stopping your business activities.
Cancelling your GST registration may affect some, but not all, of your other registrations, including:
- fuel tax credits
- luxury car tax
- wine equalisation tax.
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Disposing of capital assets
There may be GST and capital gains tax implications when you dispose of your capital assets.
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Margin scheme
The margin scheme is an alternative method of calculating the GST payable when you sell land or buildings as part of a business.
You may need more information if you are selling or buying property and the seller asks you to sign an agreement in writing for the margin scheme to apply.
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Sale of a going concern
A going concern is a business that is operating and making a profit. No GST is payable on the sale of a going concern if certain conditions are met. However, as the seller, you may be able to claim input tax credits for GST you paid on expenses relating to the sale.
Next step:
- Refer to GSTR 2002/5 – to work out whether the sale of a business meets the requirements of a 'supply of a going concern'.
Financial supply sale
The sale is a financial supply if your business is a:
- company and you sell its shares
- trust or partnership and you sell the underlying interests in the trust or partnership.
These types of sales are 'input taxed' if you exceed the financial acquisitions threshold.
An input-taxed supply means no GST is payable and you cannot claim input tax credits for GST expenses relating to the sale.
Next step:
- Refer to GSTR 2003/9 – to work out whether you exceed the financial acquisitions threshold.
Input taxed sale
If the sale of your business is input taxed, you may need to apportion the amount of input tax credits you can claim.
If you don't exceed the financial acquisitions threshold, the sale is treated as if it was GST free and you will be entitled to full input tax credits.
See also:
- Refer to GSTR 2006/3 – provides guidance on apportionment methods
Capital gains tax
Capital gains tax (CGT) arises when you sell or dispose of assets you acquired on or after 19 September 1985 (post-CGT assets), minus any capital losses.
Under certain circumstances, pre-CGT shares in a company or trust may become subject to CGT.
You need to consider your CGT liability when selling any asset.
Small business concessions
There are various CGT concessions available to small business owners. Correctly applying these concessions may reduce your CGT liability when selling a business.
Specific concessions include the:
- 15-year exemption – that may exempt a capital gain from a business asset you have owned for at least 15 years
- 50% active asset reduction – that allows you to reduce the capital gain arising from the sale of a business asset
- retirement exemption – that allows you to receive relief from CGT if you sell assets called active assets used in your business – the exemption does not apply to gains made from passive (investment) assets
- rollover – that allows you to defer a capital gain from the disposal of a business asset for two years (you can defer the capital gain for longer than two years if you acquire a replacement asset or make a capital improvement to an existing asset).
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Earnouts
Broadly, an earnout is an arrangement where you:
- sell an income-producing asset – for example, a business
- agree to receive additional payments based on the future performance of the asset.
For tax purposes, you can use the look-through treatment for earn out rights or you can treat an earnout as a separate asset that may have separate CGT implications (including the small business CGT concessions).
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Buy or sell agreements
A buy or sell agreement sets out an arrangement designed to protect the interests of the departing owners and the remaining owners, while preserving the business itself.
There are two key features to a buy or sell agreement:
- the transfer aspects of the transaction
- the funding arrangements.
The features of the buy or sell agreement may raise additional tax issues, such as CGT.
See also:
- ATO ID 2004/668 Income tax – Capital gains tax: buy-sell agreement - time of CGT event A1
- ATO ID 2003/1190 Income tax – Capital gains tax: business succession agreement - put and call options CGT event D2
Cap election
You need to complete the Capital gains tax cap election if contributions have been made to your super fund during the financial year, from the disposal of certain small business assets.
This is important if you:
- want to exclude these contributions from the non-concessional contributions cap
- have not reached your CGT cap amount (this amount is indexed on an annual basis and rounded down to the nearest $5,000).
Next step:
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Rollover statement
Under tax law, you must provide certain information to a super fund when an individual (including a sole trader or partner in a partnership), company or trust rolls over an eligible termination payment consisting of a CGT-exempt component to a super fund.
You do not have to use this form but it can help you:
- with record keeping
- facilitate the rollover process.
A CGT-exempt component is made up of the proceeds of the sale of certain small business assets in connection with retirement.
Next step:
Division 7A
If you are a private company owner, under tax law you must treat your private expenses separately from your company expenses.
When buying or selling a private company, you must treat any advances, loans and other payments or credits to shareholders (or their associates) correctly.
Payments, loans and debts forgiven by a private company to shareholders and their associates may be treated as dividends under Division 7A of Part III of the Income Tax Assessment Act 1936.
Next step:
- calculate the distributable surplus of a private company and its effect on amounts treated as dividends under Division 7A.
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Debt forgiveness
Division 7A also applies to debt forgiveness.
If a private company forgives all or part of a debt owed by you when you are a shareholder or an associate of a shareholder, the debt may be treated as dividends under Division 7A.
Also, the rules are designed to ensure that a trustee cannot shelter trust income at the prevailing company tax rate by creating a present entitlement to an amount of net income in favour of a private company without paying it, and then distributing the underlying cash to a shareholder (or their associate) of the company.
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Calculator and decision tool
Use the Division 7A calculator and decision tool to:
- work out whether a direct transaction by a private company to a shareholder or their associate will be deemed a dividend
- calculate the minimum yearly repayment required on a loan to avoid a deemed dividend arising under Division 7A
- calculate the amount of the loan not repaid by the end of an income year.
Next step:
Winding up a company
Both solvent and insolvent companies can be wound up voluntarily or involuntarily. While some of the references in this document relate to the winding up of insolvent companies, they may also apply to the voluntary winding up of solvent companies.
The tax consequences of winding up a company can be at the company level or the shareholder level (or both).
Shareholders are normally entitled to the surplus that remains after a company has paid off its creditors and discharged all its outstanding liabilities in the winding up process.
Shareholders that receive distributions of surplus assets in the winding up of Australian companies may be liable to taxation under either the deemed dividends or capital gains tax provisions.
Seek professional advice
It's important to seek advice from a trusted professional adviser sooner rather than later. Ensure that the person you engage is a registered professional, such as an accountant, lawyer or accredited insolvency adviser.
Be cautious of unregistered advisers who claim to give pre-insolvency advice and who may encourage you to engage in inappropriate or even illegal activity, like illegal phoenix activity. Illegal phoenix activity is when a business is deliberately shut down to avoid paying its debts. It also includes inappropriately removing assets from a business prior to winding up.
Be wary of advisers cold calling you with advice or ways to restructure in a way that will help you avoid paying debts or obligations, or to transfer or conceal assets so that they are not available to pay creditors.
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Deemed dividends
The winding up of a company or the discontinuation of its business is covered in section 47 of the Income Tax Assessment Act 1936 (ITAA 1936). The basis of section 47 is that it may deem certain distributions to be dividends. Certain distributions may be deemed to be dividends which are included in the shareholder's assessable income.
The appropriation of a distribution from a particular fund (such as paid-up capital, retained earnings or capital gains accounts) determines the character of the distributed amount.
In certain situations, the character of these amounts does not 'wash out' in the course of liquidation distributions as it would if made prior to liquidation. For example, a pre-capital gains tax (CGT) capital gain in the hands of the company may retain its tax exempt status when distributed by a liquidator, but may lose its exempt status if distributed prior to liquidation.
Taxation Determination TD 95/10 explains how the appropriation from a particular fund determines the character of the distributed amount.
TD 2000/5 explains how capital losses are treated in the context of TD 95/10.
If you meet specific conditions, we may disregard a deemed dividend that would otherwise arise under Division 7A, or allow you to choose to frank the deemed dividend.
See also:
- Commissioner's discretion under Section 109RB
- TD 95/10 Income tax: what is the significance of the Archer Brothers principle in the context of liquidation distributions?
- TD 2000/5 Income tax: capital gains: does the requirement to disregard capital losses in Step 2 of the method statement in paragraph 47(1A)(b) of the Income Tax Assessment Act 1936 affect the application of the Archer Brothers principle?
Capital gains tax
In general, the normal CGT provisions apply to an act carried out by a liquidator, as if the act had been carried out by the company. For example, if a liquidator sells a CGT asset of the company, any capital gain or loss is made by the company, not by the liquidator.
At the shareholder level, the CGT provisions can also be triggered when a company being wound up makes final or interim distributions and/or when a company is deregistered under the Corporations Act 2001.
TD 2001/27 explains how the CGT provisions treat final and interim distributions where all or part of the distribution is not deemed to be a dividend under section 47.
In certain circumstances, shareholders can choose to realise a capital loss on worthless shares prior to the dissolution of the company.
Other considerations
Commercial debt forgiveness provisions may apply where a company's obligation to pay a commercial debt is extinguished because the company is wound up.
For more information for companies being wound up as part of a consolidated group see:
- ATO ID 2003/739 Income tax – consolidation – liquidation of a head company (relates to a head company)
- ATO ID 2003/964 Income tax – consolidation: subsidiary in liquidation – membership of consolidated group (relates to a subsidiary)
- TD 2007/12 Income tax: consolidation: subsidiary in liquidation (relates to intra-group liabilities)
- TR 2007/13 Income tax: application of the transferor trust and controlled foreign company measures (relates to CGT event L5).
A liquidator's taxation responsibilities
The appointment of a liquidator can be compulsory or voluntary for either solvent or insolvent companies.
Normally, a liquidator must be a registered liquidator and must not be an officer, employee or auditor of the company. However, a member's voluntary winding up is exempted from this requirement under the Corporations Act 2001.
Liquidators' income tax responsibilities are separate from, and in addition to, their responsibilities under the Corporations Act 2001 and other taxing Acts.
Our Practice Statement Law Administration in section 5 of PS LA 2011/16 sets out the tax obligations of representatives of incapacitated entities, this includes liquidators and administrators.
Failure to comply may result in penalties or the liquidator being personally liable.
When contacting us about insolvency, complete the Debt insolvency cover sheet. This will ensure your tax clearance request is allocated and actioned correctly.
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Superannuation
If you are planning for retirement, are semi-retired or just looking at your options, the superannuation system may influence what you do with the proceeds from the sale of your business.
The withdrawing your super and paying tax measure allows individuals to access their super benefits, once they reach their preservation age, without having to retire or leave their jobs.
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Demergers
A demerger is a form of restructure. In a demerger, investors in the head entity (for example, shareholders or unit holders) gain direct ownership in an entity that they formerly owned indirectly (the 'demerged entity'). The underlying ownership of the companies or trusts that formed part of the group does not change. The company or trust that no longer owns the entity is known as the 'demerging entity'.
Under the demerger provisions you may not be eligible for tax relief if either the:
- demerger is not undertaken for substantive business reasons
- capital and profit elements of the demerger allocation do not reflect the circumstances of the demerger.
Our Practice Statement Law Administration PS LA 2005/21 provides administrative and technical guidance on applying the elements of section 45B, and to provide certainty to your situation we recommend you seek a private ruling or class ruling
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Finalising employee or contractor obligations
Your business must continue to meet its obligations until it is either closed or sold to the new owners.
If you are an employer, it is important for you to consider finalising important tax issues for your workers, even though the business is no longer trading or has been sold. These issues include:
- fringe benefits tax (FBT)
- pay as you go (PAYG)
- superannuation
- eligible termination payments.
Your obligations may vary, depending on whether the worker is an employee or contractor. Director penalties can apply for unpaid superannuation, PAYG withholding and GST liabilities the business has incurred, even if they are not yet due when you close the business.
Superannuation
You are still required to pay the minimum amount of superannuation (SG) for your employees and some contractors to the correct fund by the due date in order to avoid being liable to pay a super guarantee charge (SGC). This will be based on ordinary time earnings for the quarter.
If you cannot pay the full SG contributions, pay as much as you can to their fund by the due date, to reduce the SGC. You will need to lodge the SGC statement within 28 days after the quarterly SG is due and pay the charge to us.
If you are having trouble paying the SGC, we can work with you to set up a payment arrangement.
Single Touch Payroll (STP)
If an employee’s employment has ended, make sure you report their cessation (end) date in your STP report. If your STP-enabled software has transitioned to STP Phase 2, you will also need to report the employee's reason for leaving.
If you have already paid them their final pay, you can still tell us this information by submitting an update event. You don’t need to wait until the end of financial year to finalise your STP data. Finalising is an important step as it enables individuals to lodge their income tax return at the end of the year.
If you don't report through STP you will need to lodge a PAYG payment summary annual report.
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Record keeping obligations
Under the tax law, you must keep records for five years after the records are prepared or obtained, or the transactions are completed, whichever occurs later. These include records relating to:
- sales (including the sale of your business and assets if applicable) and purchases
- payments to employees
- payments to other businesses.
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Lodgment obligations
PAYG instalments
When you exit your business, you may still have a PAYG instalment obligation through to the date of ceasing business. You may continue to receive instalment activity statements even after cancelling your Australian Business Number (ABN).
You can choose to vary your PAYG instalment rate or amount if you think the amount or rate we calculated on your instalment activity statement doesn't correctly reflect your circumstances due to you ceasing business.
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Pay outstanding tax liabilities
When you close your business, you need to settle any outstanding amounts owed to us, including any liabilities that arise from your final income tax return or activity statement lodgment and any liabilities which are not yet due.
You can make payments to us in a number of ways.
We understand that occasionally it may not be possible to pay on time, and we can help you.
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Lodging final activity statements
You must complete an activity statement for the tax period in which your registration cancellation 'date of effect' occurs. You must report all of the following information:
- all the sales, purchases and importations made in your final tax period including the sale of the business
- any adjustment for assets held after cancellation
- any other adjustments.
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Lodging final Taxable payments annual report
If your business provides taxable payments annual report (TPAR) relevant services you may need to lodge a TPAR for payments to contractors up until you close or sell your business.
Cancelling registrations
Australian business number
You must notify us of changes to your details on the Australian Business Register (ABR) within 28 days.
If you permanently close your business, you need to cancel your ABN. However, before doing this, first ensure you have met all the lodgment, reporting and payment obligations you have to the government agencies you deal with. Your tax obligations may include lodging activity statements, PAYG withholding reports and taxable payments annual reports, repaying refunds of GST credits and paying outstanding tax debts.
Cancelling your ABN will also cancel:
- any authorised relationship between an ABN and a myGovID
- your registration for GST, luxury car tax, wine equalisation tax and fuel tax credits.
There are a number of options available if you want to cancel an entity's registration for any of the following:
- Australian business number (ABN)
- goods and services tax (GST)
- fuel tax credits (FTC)
- luxury car tax (LCT)
- wine equalisation tax (WET)
- pay as you go (PAYG) withholding.
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Companies
If the company will not lodge tax returns in future years, print 'FINAL' in the box at this item on the company tax return.
If you are a subsidiary member of a consolidated group, do not print 'FINAL' if membership of the consolidated group is the only basis on which the company will not be required to lodge future tax returns.
A change of directors or shareholders is not a change of entity.
Once a company is deregistered with the Australian Securities & Investments Commission (ASIC), it ceases to exist and can no longer lodge forms with us. Any forms lodged in respect of a deregistered company will be cancelled and not processed.
We cannot discuss protected information relating to a deregistered company, including with people formerly authorised to act on behalf of that company.
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Partnerships
If your partnership has stopped trading and the assets have been distributed during the year, answer 'YES' at the label stating 'Final tax return' on page 1 of the partnership tax return.
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Trusts
If you wound up the trust during the year and you have distributed all the trust's assets, print 'FINAL' at the label 'Final tax return' on page 2 of the trust tax return.
Show any proceeds you received from the sale of your business in your personal Individual tax return.
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This overview covers the most common topics you need to consider when selling or closing a business.