If you established your business under a company structure as part of the set-up process there would have been shares issued, so you probably own shares in your company. Not a big deal you may think, with all the focus on the business and building it. The shares are just something necessary as part of the set up process and you may not even be holding the share certificates.
If this is you it might be an idea to have another think about it because the beneficial ownership of the company and the business rests with the shareholders. That’s OK while the status quo remains but the moment there is any change in the business the issue of who holds the shares becomes important.
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CGT small business concessions rules are complex – Don’t go it alone!
Q. We are looking to sell our business and will be relying on the CGT small business concessions to reduce our tax exposure. The shares are held between two families and we have a number of different shares classes on issue. Is there anything we need to be looking at in advance of the sale?
A. Eligibility for the CGT small business concessions is tested at the time of the CGT event. This is when you sign the contract for sale of the business. If you are relying on the small business concessions to manage your capital gain then it makes good sense to have your position reviewed in advance of any sale. You should not attempt to do this yourself. You need to have your accountant or tax adviser complete this for you. The CGT rules are complex and the review should be completed by someone who fully understands all of the rules and how they will apply to your situation. They will need to have all of the facts available to test your position. Often people get caught out in this area because of small details that are over looked.
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Changes a plus for vendors
Q. The recent Budget announced a change to the tax treatment of earn out rights. We are in the process of selling our business and we will receive a lump sum in consideration plus an earn out right which will be calculated over the following two years based on the revenue of the business. What are the tax implications for us and are the recent changes favourable to us?
A. The changes announced in the budget should help to overcome the existing tax treatment of an earn out right based on a tax ruling issued by the Commissioner a few years ago. Under this tax ruling where you sell your business for a lump sum amount plus an earn out right, the deemed consideration for capital gains tax purposes is the lump sum amount plus a valuation of the earn out right at the date of the CGT event.
Selling up? Watch out for CGT
If you’re selling your business, the CGT small business concessions have the capacity to reduce your capital gains tax liability to $0. Understandably, the tax savings that can be achieved make the concessions very popular with business owners. However, the extent of the tax savings also means that the concessions come under close Tax Office scrutiny. Quite a few taxpayers have been stung with very large and unexpected tax bills because they claimed the concessions but did not pass the eligibility tests. FIND OUT MORE
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