We continue to be instructed to advise on the tax implications of the sale and purchase of SME businesses, be that share sales or business asset sales and for many clients what stands out is the lack of pre-sale tax planning that occurs before a Terms Sheet or Heads of Agreement is signed.
For business owners who could qualify for the Small Business Concessions, being able to meet the numerous basic conditions, as well as the specific conditions required based upon the asset being sold and the concession sought to be claimed, doesn’t often happen by accident.
Having an understanding of the following matters even before a sale is contemplated is vital in ensuring the sale process is structured correctly and for Vendors and Purchasers, the process is as tax effective as it can be:
- Have you determined whether the Net Asset Value of the Vendor and their associated entities is less than $6 Million?
- Will the Business Entity qualify as a CGT Small Business Entity having turnover either this year or last year of less than $2 Million?
- If the Vendor is a Company or the vendor is a shareholder in a Company, are there or have there been any Class shares on issue?
- Where the Vendor is a Shareholder, have you tested the Active Asset Percentage of the Company for at least half the period the shares have been held?
- Where the Vendor is a Shareholder, have you confirmed that the Company itself is valued at less than $6 Million?
- Is the Company the subject of an Interposed Entity Election?
Whilst the receipt of the Terms Sheet usually starts the formal due diligence process, being aware of your client’s succession plans and actively assisting them in ensuring that their business interests are in the best shape possible to minimize the tax payable on what could be their last pay day is vitally important.
Ensuring that a discussion on succession becomes part of every client meeting is a good way to ensure that the Accountant is involved in the pre-sale process and can either advise or assist in any pre-sale planning or restructuring BEFORE it is too late.
Some recent matters that we have advised on that would have benefited greatly by some pre-sale planning include:
- The sale of shares in a Company where it was later found an Interposed Entity Election had been made for that Company;
- The sale of shares in a Company where it had previously held excess cash on deposit such that it failed the 80% Active Asset test in various prior years;
- The sale of Shares in a Company that had a G Class shares issued to a former shareholder still on issue, even though it had never been utilised;
- The sale of Business Assets in July 2024, when the business turnover for the 2024 year was above $2 million, yet it was below $2 million in the 2023 financial year; and
- The sale of Business Assets rather than shares where most of the Purchase Price was allocated to Plant and Equipment that had been fully expensed under the TFE rules.
In all of the above scenarios, the cost of not getting pre-sale advice was, unsurprisingly, substantially higher than the time and cost that would have been spent on planning for the eventual sale.
If you need any assistance in advising your clients on a proposed or likely business assets or share sale, please contact Sean, Mimi or Ross, on 9481 8448.