Company Tax Structures – Capital Gains Tax considerations

As you may be aware Individual taxpayers have access to a variety of capital gains tax (CGT) concessions including the general CGT discount, which reduces the assessable capital gains in half. But what about companies?

Whilst there are many advantages when operating a business through a company tax structure, consideration should be made on the CGT implications on any assets sold. This is because companies are not entitled to CGT general discount and any concessions applied can cause future tax implications.

Let’s say you’ve operated a successful business through your private company. You’ve received an attractive offer from someone who is interest in purchasing your business, which will set you up for life. The question is though, how much of this will go to the taxman?

Capital gains tax will apply to the profit on the sale of a business. However, there may be small business CGT concessions available. These include:

• 15-Year exemption: Applied if you have owned the business for more than 15 years and the sale of the business is in connection with your retirement.
• 15% active asset reduction: Can reduce the capital gain by 50%
• Retirement exemption: Claim a lifetime exemption of $500,000
• CGT active asset rollover: Defer the CGT by purchasing a new business.

Careful consideration must be made when applying these concessions as each of these concessions may result in future tax implications. Applying these concessions also depend on your overall goals and objectives. For example, it may not be your desire to lock money away in superannuation at an early stage in life, therefore the retirement exemption may not be suitable.

Generally, the capital gains tax is easy to deal with for individual taxpayers, as this is the last taxing point. The issue for companies is identifying the tax implications the individual shareholder when gaining access to the capital gains held in the company.

Companies pay dividends to shareholders, which are generally pre-taxed known as franked dividends. So what happens to the amounts that aren’t tax. Generally, these amounts are paid out as unfranked dividends and can be a sizable amount when CGT concessions have been applied.

There are ways to assess the capital gain component in a tax effective manner but largely depend on your personal business goals and objectives. Please contact our Plant and Associates team to discuss strategies associated with the sale of your business.