Make selling your business less taxing
Selling a business you have spent so many years building up can be a difficult process, but getting the best price is not the only consideration. Tax has a big role to play in the financial result.
That means the ATO will be paying close attention. Selling a business is considered as disposing of an asset, so it triggers a capital gains tax (CGT) event.
If your sale isn’t handled correctly, you could find yourself on the receiving end of a hefty tax bill and a lot less profit than you expected.
Tax on sale proceeds
In most cases, planning your exit should start when you establish your business. That way you can choose a business structure that makes the most of the various tax concessions available. These are complex, so contact us for advice about which concessions may be apply to your business.
For tax purposes, selling a business is considered part of your business income, so the proceeds are taxed at the normal rate for your business structure.
For sole traders and partnerships, this can be as high as 47 per cent. Whereas small businesses operating through a company structure are taxed at the significantly lower rate of 26 per cent.
Calculating your CGT bill
Your CGT bill when selling depends on a range of factors, including how much it cost you to purchase the business, referred to as your cost base, sale price and the available tax concessions.
A decade ago, Ayumi set up a small dental practice. Over the years she has significantly grown her client base and now earns an annual salary of $190,000. Her current tax rate is 47 per cent (including the Medicare levy).
Ayumi agrees to sell the business to one of the dentists she employs in the practice for $500,000.
As she started the business from scratch, her cost base is nil, so when the sale goes through she will have triggered a $500,000 capital gain. (Her business set-up costs are not included in the cost base).
As this capital gain is added to her personal income, a potential $235,000 ($500,000 x 47 per cent) is added to Ayumi’s taxable income. If she takes advantage of some of the small business CGT concessions, Ayumi will be able to cut her tax bill substantially.
Reconsider your business structure
Your trading entity should be carefully considered when establishing your business, but it’s a good idea to review it periodically, particularly if you are thinking of selling.
With the government actively lowering tax rates for small business entities (SBE), the structure you originally selected may no longer be the most tax effective. The tax rate for SBEs operating as companies dropped from 27.5 per cent to 26 per cent from 1 July 2020 and a further cut to 25 per cent is coming in 2021-22.
Operating as a company also gives you the option to sell your business in different ways. You can either sell shares in the business or sell the business as an asset.
Exiting a business operating as a trust, sole trader or partnership is always an asset sale, but with a company structure either option can be used.
Minimise your CGT
Carefully reviewing your tax structure and negotiating the right type of sales agreement also allows you to maximise the valuable small business CGT concessions.
For example, if you operate through a company structure and can negotiate a share sale, you can access several CGT concessions that significantly reduce your CGT bill.
The concessions are also important to keep in mind when setting and negotiating your sale price.
If your sale price is over the $6 million maximum threshold, it may be worth reducing it to qualify for the small business CGT concessions.
Getting good advice
With so much at stake, professional planning and support are essential when the time comes to sell your business.
Many of the tax concessions are only available once, so it’s essential to organise your business and the sales process to maximise the available benefits.
Preparing your business for sale takes time and planning, if you would like assistance with your exit strategy please give us a call.
Building resilience to spring back stronger than ever
Our resilience has been tested of late and continues to be, with the ongoing situation of the coronavirus pandemic throwing challenges our way.
Resilience has certainly become a now frequently used buzzword, but what does it actually mean? According to the Oxford dictionary, the word resilience means “the ability of people or things to recover quickly after something unpleasant, such as shock, injury, etc.” It also relates to the ability to return to the original form or position after being bent, compressed or stretched.
Not just recovering, but improving
What makes someone resilient? We often use this term to describe someone who can bounce back from a difficult situation or who takes challenges in their stride. Perhaps it’s a person who receives the news they didn’t land their dream job and is able to be pragmatic about it, or someone who receives a frightening health diagnosis and is able to calmly consider the next steps.
Resilience tends to be thought of as something that keeps us going as we were. But what if we instead think of resilience as not simply returning to the original form, but changing shape and improving? Not bouncing back, but moving forward in order to become stronger and better able to deal with the next challenge that comes your way.
Modelling yourself on resilient people
One way to improve your own resilience is to model yourself on resilient people. Studies show us that resilient people use positive emotions to recover and find the positives in stressful situations. As resilience can mean different things to different people, we can look to those we perceive as resilient to model ourselves on. Have a think about the resilient people in your life, or even in the public eye – what characteristics do they have? What is their perspective on the challenges they face? How do they dust themselves off and keep going when things aren’t easy?
The good news is that it’s never too late to build resilience. Look for opportunities to face, rather than avoid, your fears – you can start small and build your confidence. Perhaps you struggle to have salary conversations at work or ask for that promotion. You mightn’t put yourself forward for new opportunities as you worry about being rejected. By instead putting yourself out there you do risk disappointment, but learning to manage any frustration or let-down is part of honing resilience.
Reframing the narrative is also an important factor of resilience. If you see yourself as someone who can’t handle challenges, it’ll be difficult to build the confidence needed to do so. It’s worth also looking at how you deal with stress and what you may be adding to stressful scenarios – do you make a drama out of unexpected events? If so, how can you better react to them to minimise stress? Use difficult scenarios as a learning process and an opportunity for improvement, which will help you see them in a different light.
It’s much easier to be resilient when you are supported by a strong network of people. Studies have found that people with positive social relationships are less likely to struggle with depression, which can be a factor in low resilience. Friends and family often fill this support role, but there are other forms of support you can draw on, such as a coach, psychologist or online forums and groups.
While difficult times and situations challenge us, they can also propel us forward. They give us the opportunity to strengthen our resilience and not just ‘re-form’ into the person we were before, but become an improved version of ourselves.
Life isn’t always an easy path and some situations may present more of a challenge than others, so it is important you reach out if needed – you don’t need to deal with difficulties alone, so speak with your GP or mental health professional if you need some help.
Watching our online and social spending
The changes to our daily lives of late have caused us to reframe our views on ‘screen time’, an activity that now more than ever takes up a significant proportion of our day.
However, as we spend more time online, we are also spending more online and it pays to be mindful of the ways our browsing habits impact our hip pocket.
With the average Australian spending over six hours on social media every week, it’s safe to say we’re affected by what we consume online. This can happen consciously, from actively looking up brands and products, or subconsciously, through viewing advertisements directed at us.
Social networking to selling
When Facebook first started gaining popularity in the noughties, its focus was on social networking. By 2016 it had evolved into a marketplace so users could sell to each other, regardless of whether they were connected. Facebook also had over seven million advertisers during the third quarter of 2019 alone. So when you log into your Facebook account these days, it’s just as likely to be because you’ll buy something than to socialise.
Similarly, Instagram has developed from simply sharing photos. A 2019 survey showed that 81% of respondents use their accounts to research products and services, and 130 million users view shopping posts every month.
Easy social shopping
The sophisticated and seamless purchasing experience offered by social media platforms has made shopping even easier and buy now, pay later services such as Afterpay also make it easier to purchase an online product or service through instalments.
Hard to resist targeted advertising
While users are able to search for products and purchase online, the data collected from social platforms allow marketers to target individuals based on their demographics, interests and online behaviour. Have a look at the ads that appear when you next log in – chances are they’ll be relevant to you. Your data, such as your browsing history and the apps you use, can be tracked and used to present targeted advertising on your feeds. This practice isn’t a secret, but it can still be surprising (and even unsettling) as to how tailored this advertising can be. With advertising pinpointing your real and anticipated needs, it can be hard to resist buying. And with data kept of previous ads you responded to, you’ll see even more similar ads after you purchase from an ad – keeping you in the spending loop.
Influencing our buying behaviours
‘Keeping Up With The Joneses’ is prevalent on social media, where people compete for the most likes thanks to their extravagant lifestyles. But it’s not just envy which induces us to spend. We turn to those we trust when it comes to making decisions, which is why when we see friends, families and ‘influencers’ (people we respect and trust) using a product or service and having a positive experience, this acts as social proof.
Fear of Missing Out
FOMO – it’s a thing and something that can be worsened by social media, making it tempting to spend on the latest gadgets or lifestyle trends. Comparing yourself to others can create anxiety and also induce spending to ‘keep up’. However, there’s a growing movement towards JOMO, the joy of missing out.
With financial anxiety on the rise, JOMO is much better for our hip pocket than FOMO.
Watching your hip pocket when it comes to your social spend can be challenging. If you are concerned about your spending, set a budget which allows for the amount of online shopping you are comfortable with. It’s a good idea to keep track of your purchases to ensure your spending is not to the detriment of your day to day needs as well as your longer-term financial goals.
Finally, just having a greater awareness of how social media influences your behaviour will help you to resist the subtle enticements of social marketing.