How to Navigate Tax Implications of Selling a Business

Selling a business is a major financial decision, and understanding the tax implications is essential to maximising your profit.

Without proper tax planning, most of your sale proceeds go toward taxes. Your business's structure, how you sell it, and even the timing of the sale can all affect your tax liability.

If you plan to sell a business in Australia in 2025, this guide will help you navigate the key tax considerations, ensuring you make informed decisions and retain as much of your hard-earned wealth as possible.

Let’s Get Straight to the Point

Selling a business in Australia has various tax implications that can significantly impact your final earnings. Here's a quick breakdown:

• Capital Gains Tax (CGT): The sale of a business generally incurs CGT, but exemptions and discounts may apply.
• Business Structure: Whether you operate as a sole trader, company, partnership, or trust will influence how the sale is taxed.
• Asset vs. Share Sale: Selling assets or selling shares has different tax consequences, especially for company owners.
• Small Business Tax Concessions: You could reduce or eliminate CGT liability if eligible.
• Payment Terms & Timing: The sale structure (lump sum vs. instalments) affects when and how tax is applied.
• Other Taxes to Consider: GST, stamp duty, and estate planning taxes may also apply.

What is Capital Gains Tax (CGT)?

In Australia, Capital Gains Tax (CGT) applies when you sell an asset, including a business. The capital gain is calculated as the difference between the sale and original purchase prices (cost base).

• If you’ve owned the business for over 12 months, you may be eligible for the 50% CGT discount (for individuals and trusts, but not companies).
• The CGT rate depends on your income tax bracket, as capital gains are added to your assessable income.

How to Reduce Your CGT Liability

Several concessions can help reduce or eliminate CGT when selling a business:

15-Year Exemption

This exemption applies if:

• You have owned the business for 15 years or more.
• You are aged 55 or older and are selling due to retirement or permanent incapacity.

Under this rule, you will not pay CGT on the sale proceeds. This is one of the most generous tax exemptions for business owners looking to retire.

50% Active Asset Reduction

If your business qualifies as an active asset, you can apply for a 50% reduction on the capital gain before CGT is calculated.

• An active asset is a business asset used in the operation of your business for at least half the ownership period.
• This concession can be used in addition to the 50% general CGT discount for individuals and trusts, meaning you could only pay tax on 25% of the capital gain.

Small Business Retirement Exemption

If you are under 55, you can contribute up to $500,000 of capital gains into your superannuation fund without paying tax.

• If you’re over 55, you can take the proceeds tax-free without contributing to super.

Small Business Rollover Relief

• You can defer CGT if you reinvest the sale proceeds into a new business within two years.
• If you fail to reinvest, the deferred CGT becomes payable.

Does Your Business Structure Affect Taxes?

Your business structure plays a significant role in how the sale is taxed.

1. Sole Traders & Partnerships

• Owners pay CGT on their share of the capital gain.
• Eligible for small business tax concessions.
• Profits from the sale are added to personal taxable income, so timing the sale can impact the tax rate.

2. Companies

• Companies do not qualify for the 50% CGT discount.
• The sale may result in double taxation:
  1. The company pays corporate tax on capital gains.
  2. When profits are distributed as dividends, shareholders may also be taxed.

3. Trusts

• If a trust owns the business, the capital gain is passed to beneficiaries, who pay tax at their personal tax rate.
• Trusts qualify for CGT discounts and small business concessions.

Asset Sale vs. Share Sale: What’s More Tax-Effective?

The tax treatment of a business sale depends on whether you sell assets or shares. Each has different CGT, GST, and tax deduction implications for buyers and sellers.

1. Asset Sale: Selling Business Assets

In an asset sale, the seller transfers individual business assets, such as equipment, goodwill, and intellectual property.

Why Buyers Prefer It:

• They can claim tax deductions on depreciable assets.
• They avoid inheriting existing liabilities.

Tax Implications for Sellers:

• CGT applies to each individual asset sold.
• Goodwill and intangible assets attract CGT without depreciation benefits.
• GST may apply unless sold as a going concern.

Best for Sellers Who:

• Qualify for small business CGT concessions.
• Want to separate personal liabilities from business assets.

2. Share Sale: Selling Company Shares

A share sale transfers ownership of the entire company, including assets, liabilities, and contracts.

Why Sellers Prefer It:

• Lower CGT liability if eligible for CGT discounts.
• No GST applies, unlike an asset sale.

Challenges for Buyers:

• They inherit all business liabilities.
• No tax depreciation on acquired assets.

Best for Sellers Who:

• Own a company and want to reduce CGT.
• Prefer a cleaner exit without asset transfers.

3. Which is More Tax-Efficient?

• Buyers benefit from an asset sale due to tax deductions.
• Sellers often prefer a share sale to reduce CGT and avoid GST.

The best option depends on business structure, tax position, and buyer preferences. Consult a tax expert to determine the most tax-efficient approach.

The Impact of Sale Timing & Payment Terms on Taxation

Your business sale's timing and payment structure can significantly impact your CGT liability and overall tax burden.

1. When You Sell Matters

• Selling in a Low-Income Year: Reduces CGT, as capital gains are added to taxable income. If earnings in 2025 are lower, selling before 30 June may result in a lower tax rate.
• End-of-Financial-Year Planning: Delaying the sale until July 2025 may spread income across two financial years, reducing tax liability.

2. How You Get Paid Affects Tax

• Lump Sum Payment: Entire sale price taxed in one financial year, potentially pushing you into a higher tax bracket.
• Instalments: Spreads payments over multiple years, reducing annual taxable income.
• Earn-Out Arrangements: Payment depends on future business performance, delaying tax obligations but carrying risk.

3. Best Approach?

• Lump sum suits those eligible for CGT concessions.
• Instalments and earn-outs help reduce immediate tax liability.

Planning with a tax specialist ensures a tax-efficient sale and maximises your after-tax earnings.

Other Taxes You Need to Consider

1. Goods and Services Tax (GST)

• If your business is registered for GST, the sale of assets may be subject to GST.
• If you sell the entire business as a “going concern”, it may be GST-free.

2. Stamp Duty

• Some states impose stamp duty on business asset transfers.
• Share sales generally do not attract stamp duty in most Australian states.

3. Estate Planning & Inheritance Tax Considerations

• Business sale proceeds could increase the value of your estate, potentially leading to higher estate tax liabilities.
• Succession planning is essential to pass your business to family to minimise tax exposure.

How to Legally Reduce Your Tax Bill

Selling a business can lead to a high tax bill, but smart planning can reduce or eliminate some liabilities. Here are key strategies:

1. Maximise Small Business CGT Concessions

If your business has assets under $6 million or a turnover below $2 million, you may qualify for CGT concessions, including:

• 15-Year Exemption: No CGT if you’re 55+ and retiring after 15+ years of ownership.
• 50% Active Asset Reduction: Pay tax on only half your capital gain.
• Retirement Exemption: Up to $500,000 in capital gains can go tax-free into superannuation.
• Small Business Rollover: Defer CGT if you reinvest within two years.

2. Sell in a Low-Income Year

Since capital gains are added to taxable income, selling in a low-income year reduces your CGT rate. If you’re retiring or earning less, this can save thousands in taxes.

3. Structure the Sale Smartly

Your tax burden depends on whether you choose an asset sale or share sale:

• Asset Sale: Preferred by buyers for tax deductions, but sellers face CGT and GST.
• Share Sale: More tax-efficient for sellers, as CGT discounts may apply and double taxation can be avoided.

4. Use Superannuation to Lower Taxes

Contributing business sale proceeds to super can reduce CGT. The retirement exemption allows up to $500,000 to be contributed tax-free to super, lowering your tax liability while boosting retirement savings.

5. Plan with a Tax Specialist

A tax professional helps maximise CGT savings, optimise timing, and structure payments to keep more of your profits. Early planning ensures a tax-efficient business sale.

Conclusion

Selling a business in Australia comes with significant tax considerations. Without proper planning, you may have a much lower final payout than expected. The right business structure, sale type, and tax planning strategy can greatly affect how much money stays in your pocket.

Before finalising any sale, seek advice from an accountant, tax lawyer, and financial planner. A well-planned exit strategy ensures you keep more profits while complying with Australian tax laws in 2025.

If you’re considering selling your business, start planning early to take advantage of every possible tax benefit.