Lock, stock, barrel – and tax

Selling your business? Expect the taxman to take an interest (and even conduct an audit). By TERRY HAYES of Thomson Legal & Regulatory.

By Terry Hayes

Selling a business always brings a multitude of tax issues to consider. And SMEs don’t always get these issues right. So, the tax office plans to undertake audit activity concerning taxpayers seeking to dispose of their businesses. It will focus on:

• Loans, payments and debt forgiveness by private companies.
• Exits via share buy backs, capital reductions and other disposals.
• Aggressive tax planning.

The tax office intends to give taxpayers sufficient information around the tax consequences of exiting or disposing of a business to alert them to “these emerging risks” before entering into such transactions.

It will be developing what it calls a taxpayer user pathway to determine the points at which taxpayers would seek advice and assistance in the planning decisions around business exit strategies.

Of course, the tax office could not hope to cover all possible business exit strategies or tax issues, but any information that can be made available to SMEs will be welcome. Tax practitioners themselves have even suggested to the tax office that the complexity of exit strategies is a risk for taxpayers, particularly in the area of consolidations and demergers.

The tax office already provides information on a wide range of tax issues relevant to buying or selling a business, including a checklist for new businesses, tax basics for small business, tax office assistance visits for small business, a checklist for the sale of a business as a going concern under the GST rules, and more. They are all available on the ATO website. https://www.ato.gov.au/businesses/

When you are planning to sell, it is important to keep your accountant or adviser in the picture, too. There are, of course, those SME operators who will seek professional advice early through a planned exit from their business.

They are proactive and do their own initial research, and then contact their tax adviser for clarification and planning. That is to be applauded and provides an excellent opportunity to “cover all the bases”, including tax. However, real life doesn’t always allow that to happen.

There are also other business owners who are forced into exiting through some event. It may be a family issue such as illness or relationship breakdown, or a business event such as a decline in the business or even liquidation. The need for good professional tax advice in these latter circumstances cannot be overstated. This may be difficult due to the pressures to exit the business, but rushed decisions can produce disastrous results.

It is worth noting that tax practitioners believe taxpayers are often prone to getting into difficulties when they effectively move to the next level of business, such as from a sole trader to an incorporated company. Taxpayers in this situation are often not aware that they are passing different threshold tests for tax obligations, such as GST, PAYG withholding, and payroll tax. Growing a business is great, but the tax consequences need to be understood too.

Selling a business has its risks – getting the right buyer with the right finance to clinch the deal, getting the timing right, what to do with the proceeds from the sale, what are the tax implications of the sale and who will be affected?

It’s not simply a matter of a signature, and a cash handover. It’s essential where possible to carefully plan the sale, more essential where an SME operator is moving from one business to another.

By all means use the information the tax office offers – it is helpful – but also seek professional advice on all the ramifications.

Terry Hayes is the senior tax writer at Thomson Legal & Regulatory , a leading Australian provider of tax, accounting and legal information solutions.

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