The sale of a business generally occurs through the disposal of either:
- the shares or other interests in the entity that conducts the business, or
- all of the tangible and intangible assets in the business.
In either case, the vendor and purchaser need to retain documentation evidencing the transaction, including:
- contracts
- minutes of meetings recording why the business was to be sold and decisions relating to the transaction by the directors and other key decision makers
- communications between the vendor and purchaser relating to the negotiations, including any allowance for liabilities
- details of the assets disposed of under the contract, the apportionment of the purchase price to the various assets and the basis for the apportionment
- capital gains tax (CGT) calculations, including the allocation of purchase price to depreciable assets, the basis for this allocation and treatment of consideration held in escrow
- a reasonably arguable position paper or specialist advice detailing why the particular tax position has been taken
- settlement documentation
- asset registers
- trust resolutions creating income or capital entitlements of beneficiaries.
Where the business is disposed of to a related party, it's prudent to get an independent valuation of the business, including the goodwill, assets and contractual rights being disposed of.
Where you dispose of an asset, you need to determine whether it should be treated as a revenue or capital transaction. Information and views relevant to this will be found in documentation such as minutes of meetings, business plans, and documented discussions with stakeholders and consultants as well as financial statements.
Issues to consider include:
- how and why the small business CGT concessions applied
- pre-CGT implications
- application of the CGT discount
- cost base or reduced cost base
- that excise licences are not transferrable.
See also
- Selling or closing your business – things to consider
- What attracts our attention – capital gains tax
- Market valuation for tax purposes
Disposing of part of a business
You may partially dispose of your business by:
- creating a new class of shareholders or unit holders
- disposing of a portion of shares
- retiring from a partnership
- admitting a new partner into your partnership.
Key documents such the company’s constitution, trust deed or partnership agreement may be amended as a result of any of the above changes, and the rights of the existing shareholders or unitholders may be affected.
Where this occurs, the existing shareholders, unitholders and partners should consider any tax consequences, such as capital gains, value shifting or limitations on future deductions or capital losses.
More complex business disposals
More complex or non-traditional business disposals often give rise to a range of tax issues that attract the ATO’s attention and require risk mitigation by way of good tax governance.
Where your business and tax affairs are complex, additional tax governance requirements for complex business disposals may be necessary to provide us with assurance that these risks are being identified, assessed and managed.
The transaction structure and its commercial business drivers should be carefully considered and documented. We suggest you get specialist in-house or external business and tax advice.
You may also wish to engage directly with us for advice before entering the transaction. We can assist you in reducing uncertainty by clarifying how the tax law relates to your particular circumstance.
More complex business disposals may include features that attract our attention, such as:
- earn-out arrangements
- CGT rollovers
- scrip-for-scrip rollovers
- share buy backs and capital reductions
- restructures
- listing on a stock exchange
- exit from a consolidated group
- the use of a demerger to facilitate the disposal of the business
- multiple events and transactions that occur just before or on the date of the business disposal.
There may also be an impact on the interest that can be deducted if the disposal of an interest in a business results in a change to the entity’s debt to equity ratio, which may need to be recalculated at the relevant time.
Earn-out arrangements
The disposal of a business that includes an earn-out arrangement can take a number of forms. Governance practices can include:
- retaining the sale contract and other relevant agreements
- considering changes in the law examining the terms of the earn-out arrangement and identifying the contingent and non-contingent rights
- considering if there is a reverse earn-out arrangement
- estimating the value of the earn-out right and retaining documentation to support the estimate
- getting tax advice and preparing the capital gains tax calculations for the income year in which the disposal occurred
- comparing the amounts actually received under the earn-out clauses to the amount estimated.
CGT rollovers
A rollover only applies if the CGT event would have resulted in a capital gain.
If the seller seeks to claim a rollover, they, and in some instances the purchaser, must ensure that all of the requirements are met.
The seller will also need to consider if a full or partial rollover applies. A partial rollover occurs if the capital proceeds of the shares or trust interests being disposed of include something other than the shares or trust interests.
The seller may need to get tax advice.
Scrip-for-scrip rollovers
In some instances, a scrip-for-scrip rollover applies. Generally, this occurs where a seller exchanges a share or trust interest in a company for a share or trust interest in another entity.
Effective governance involves retaining key documentation to provide you with certainty. It should be readily accessible in the event that we review the transaction. Such documentation includes:
- minutes of decisions to proceed with the transaction and executed contract documents
- evidence of the interests exchanged (such as share certificates or unit registers)
- details of the CGT profile of interests, such as cost base and any pre-CGT status
- valuations
- other workings, papers or advice setting out the conditions and how they have been satisfied.
Listing on a stock exchange
Where a business owner is looking to dispose of the shares in a business via listing on a stock exchange through an initial public offering (IPO), back-door listing or reverse take-over, tax governance practices may include:
- considering Australian Securities Exchange (ASX) and Australian Securities and Investments Commission (ASIC) requirements and their tax consequences
- getting advice on the CGT treatment of any disposal of shares held by the existing shareholders
- considering whether the CGT discount and a full or partial CGT rollover apply
- considering how any additional amounts to which the existing shareholders are entitled after the event (such as additional shares or earn-out amounts) will be treated for tax purposes.
A back-door listing generally involves the disposal of an entity’s shares or assets to a company that is currently listed on the ASX. Interests sold between related parties through back-door listings should be subject to independent market valuations.
Exit from a consolidated group
Where a consolidated group disposes of a partial or the full interest in a subsidiary member, resulting in it leaving the group, effective governance practices include:
- retaining the sale contract and agreements
- preparing a statement of financial position in accordance with accounting standards as at the date of exit
- ensuring that the assets and liabilities appearing on the statement of financial position reflect market values
- undertaking allocable cost amount exit calculations
- calculating the capital gain or loss resulting from the disposal of the interest in the subsidiary member
- getting a valuation to determine the subsidiary’s market value where the purchaser is a related party
- notifying the ATO of any changes to membership.
See also
The sale of a business generally occurs through the disposal of either shares or other interests in the entity that conducts the business or all the tangible and intangible assets in the business.