As a business owner, you’ve worked hard to build your business to where it is today. But, inevitably, there will come a time when you’re ready to sell.
You might be moving on to another venture, or you might be transferring it to the next generation. You might simply be retiring, and looking to make the best choices for your family.
There are a lot of moving parts involved with selling a business, and none more important than choosing the structure for your business sale.
In this article, we’ll look at how to structure your business sale, and what this means for the proceeds from your sale.
How did you sell your business?
There are two ways to sell your business: a share sale, or a business sale. The method in which you sold your business will determine the best tax structure to choose after your business’ sale.
When a company has shares, and they decide to sell the total ownership of the company, this is known as a share sale. In this case, the buyer is purchasing all the shares, and all the company’s assets and liabilities with it. The ownership of your company’s legal entity passes on to another owner, and it’s now outside of your control.
What this effectively means is that they’re buying ownership over the company structure, not the business itself. You're now no longer bound to company tax obligations.
There are many factors that make up a business. You’ve got the business’ branding, its intellectual property, property and equipment, processes, land — even phone numbers. It also includes the intangible factor of goodwill, which the business builds up during its life.
This is known as a business sale, or asset sale. In a business sale, you’re selling those assets that make up your business. The buyer is buying these assets in order to achieve their commercial objectives. They’re buying the business, while you retain ownership over the legal business entity that you operate from.
So now that you’ve sold your business, let’s look at how different tax structures will impact your investment.
What are the pros and cons of investing the proceeds of my business sale personally?
An individual tax structure is the most straightforward structure for investments. There are no taxation reporting obligations outside of your annual tax return. You make the investments in your name, and receive 100% of the earnings.
As an individual, you can access the 50% capital gains tax (CGT) reduction if you hold your purchased investments longer than 12 months before you sell them. Investments can include shares, property, and other types of investments that suit your preference. This means you only pay CGT on 50% of the profits earned from the sale of your investments.
While you may be able to better minimise your tax, you’re limited in how you can distribute the income from your investments. There’s also more risk involved with this structure. You’re liable for 100% of the investment — there’s no screening your personal assets behind a trust or company. So if any future loans or business dealings go bad, the money you invested from your business sale is totally under threat.
What are the pros and cons of investing the proceeds of my business sale in a trust?
A trust is a suitable investment structure when large sums of money are involved. Unlike an individual structure, you’re able to choose how you distribute the income from your investments. The trust deed document you create at the formation of your trust clearly states which members can receive distributions.
A trust distribution minute must be prepared at the end of each financial year. This alerts the ATO as to which beneficiaries the profits from your trust will be distributed to.
If a corporate trustee has been implemented, then this structure also works to shield you personally from any liability incurred by the trust. This makes it a safe option for investment.
Within a trust, you also have access to the 50% CGT reduction if investments within this entity are held for longer than 12 months before you sell them. The gains are streamed to the eligible beneficiaries where each designated individual will claim the net gain within their tax return.
However, under this structure, you do give up a measure of control, as there may be multiple beneficiaries involved. They’re also costly to set up, and require an annual fee to maintain, which can eat into your investment returns.
What are the pros and cons of investing the proceeds of my business sale in a company?
A company structure is a strong choice for both individuals and businesses seeking the best tax structure for the proceeds of their business sale.
Unlike a personal and trust structure, a company structure is taxed at a flat 26% (for small businesses with a revenue of less than $50 million). This is the case regardless of the personal tax brackets of the individuals involved. Thanks to franking credits, any fully-franked dividends received in the company receive no additional tax either.
There’s also the big benefit of limited liability. A company structure creates an independent legal entity that holds all liability for the investment of the proceeds. This means that any risk to your personal assets is limited.
One drawback of a company structure is its ability to access the 50% CGT reduction. If you hold the asset for longer than 12 months, prior to selling, you can't access the 50% CGT reduction on the sale of your business. This means you’re liable to pay tax on the full sum of the profits.
Also, any losses from your investment are only able to be offset against future income from the company, not in the current financial year.
Similar to a trust structure, the costs to set up a company structure can be high, and there are strict tax and reporting requirements to take into account.
What are the pros and cons of investing the proceeds of my business sale in a self managed super fund?
A self managed super fund (SMSF) allows you to control where and how you invest the proceeds from your business’ sale.
To begin with, there are restrictions as to how much you can put into your SMSF. If your business is eligible for the Small Business CGT Concessions then you're able to put in a larger sum than if you're ineligible.
One big benefit of this tax structure for the proceeds of your business sale are the taxation rates. In superannuation terms, you’re likely going to be investing this money during the accumulation phase of your life. During this phase, any investment income in your SMSF is capped at 15% tax.
When you transition to the pension phase, you don’t pay any tax on your investment earnings at all. Nor will you pay any CGT.
However, by its nature, a SMSF means that you’re the one managing it. You’re responsible for all the financial decisions and investment choices. So unless you know what you’re doing, this can be a challenge. We recommend talking to a SMSF expert to discuss your options. They can help manage your fund for you, and provide advice and guidance on how to invest within the fund.
There are also accounting and administration fees to take into account, which can range from around $2,000 up to $5,000 or more annually. But the more your investment grows, the more cost-effective this becomes.
The final word
When trying to find the best tax structure after your business’ sale, it depends on a number of factors:
- The nature of your business sale
- The value of your business sale
- What you’re planning for the future
So depending on where you are in your life, and what your personal and professional goals are, each one of these tax structures will provide its own unique benefits.
This is why it is crucial to get expert advice when selling your business.