You’ve decided to sell or start closing your business after spending years building it up and depending on it for your livelihood.
To assist you, the Australian Tax Office provides detailed guidance on important legal and taxation matters you will need to address here. We have briefly clarified some of the more confusing requirements.
Table of Contents
Step by Step Guide to Closing your Business
Goods and services tax
Disposing of capital assets
If you are registered for GST, disposing of capital assets is a taxable sale and you are required to account for GST.
Margin scheme
If you are selling real property, the margin scheme calculates the GST as being 1/11th of the difference between the sale price and the purchase price or approved valuation.
Sale of a going concern
A business sold as a going concern is generally exempt from GST however the ATO recommends you obtain a private ruling relating to your particular circumstances.
Capital gains tax
The sale of your business’ assets may incur CGT if you sell them for more than their cost base.
Small business concessions
If you satisfy the definition of ‘small business’ for CGT purposes (currently net assets of $6 million or less) you may be eligible for:
- CGT exemption on assets owned continuously for at least 15 years;
- 50% capital gain reduction on active assets or total relief if you are retiring; and
- deferred capital gains for two years, or longer if you acquire a replacement asset.
Earnouts
If a price can’t be agreed at sale time an ‘earnout agreement’ allows payment of an initial lump sum with subsequent payments made based on the business’ performance after sale. These payments are considered received in the year the sale occurred, often requiring the amendment of prior year tax returns.
Event K6
If you own pre-CGT shares and the market value of your company’s post-CGT assets are at least 75% of the net value of the company, the ATO may deem your shares to be post-CGT assets.
Buy/Sell agreement
An agreement whereby the surviving business partners will buy out your interest in the business should you die, become disabled or retire. If the payout from a life insurance policy is used, the proceeds will be exempt from CGT.
Cap election
Should you satisfy the ‘small business’ net asset threshold and the 15-year ownership CGT exemption you may be eligible to make a non-concessional contribution of your business sale proceeds into superannuation without affecting your non-concessional cap. A lifetime limit of $500,000 applies.
Rollover statement
You must provide certain information to a super fund when rolling over an ETP consisting of a CGT-exempt component.
Division 7A
If your business forgives all or part of a debt owed by you as a shareholder or shareholder’s associate, the debt may be treated as dividends under Division 7A when closing your business. You can seek the Tax Commissioner’s discretion in this area.
Demergers
If selling your company as a number of separate entities your demerger may have CGT consequences.
Closing your business
If your company pays a distribution to shareholders of money or property that has been derived from income and not paid up share capital, that distribution may be deemed to be dividends.
CGT provisions can be triggered when a company makes a final or interim distribution where the distribution is not deemed to be dividends.
If a liquidator has been appointed to help with closing your business, it has an obligation to collect any debts owed to the ATO.
Finalising employee or independent contractor obligations
If your business has employees, including independent contractors, you will need to finalise matters relating to FBT, PAYG, superannuation and eligible termination payments for those employees.
This can be a complicated process so you should always seek professional advice regarding the legal and taxation matters involved, retain all related documentation and records, and above all else, get an accurate Business Valuation first.
FAQ
What are the first steps when closing a business?
The first steps include notifying the ATO, cancelling registrations (such as GST and ABN), and ensuring all financial records are up to date. It’s also important to review tax obligations, settle debts, and plan the disposal or sale of business assets before formally closing.
Do I have to pay GST when selling business assets?
If your business is registered for GST, selling assets is generally considered a taxable supply and GST may apply. However, if you sell the business as a going concern and meet certain conditions, the transaction may be GST-free, which is why professional advice is recommended.
Will I need to pay capital gains tax when closing my business?
Yes, capital gains tax (CGT) may apply if you sell business assets for more than their cost base. However, eligible small businesses may qualify for CGT concessions that can significantly reduce or even eliminate the tax payable.
What are small business CGT concessions?
Small business CGT concessions allow eligible businesses to reduce or defer capital gains. These include the 15-year exemption, a 50% active asset reduction, retirement exemptions, and rollover relief when reinvesting in another asset.
What is an earnout agreement in a business sale?
An earnout agreement allows part of the sale price to be paid later based on the business’s future performance. While this can help bridge valuation gaps between buyer and seller, it may also create additional tax reporting requirements.
What happens to employee obligations when closing a business?
You must finalise all employee-related obligations, including PAYG withholding, superannuation contributions, fringe benefits tax (FBT), and any termination payments. Ensuring compliance is essential to avoid penalties and disputes.
Do I need a business valuation before closing or selling?
Yes, a business valuation helps determine the fair value of your assets and overall business. This is important for tax purposes, negotiations, and ensuring you do not under- or overvalue your business during the sale or closure process.
Why should I seek professional advice when closing a business?
Closing a business involves complex legal and tax requirements, including CGT, GST, and compliance obligations. Professional advisors can help you navigate these requirements, minimise risks, and ensure the process is handled correctly.
A guide on closing your business from the ATO ‘Sale of a business as a going concern – checklist‘