One question we are often asked about at LAL is how tax applies on the sale of a business. There isn’t a black and white answer, but this article will give you an understanding of how it all works.

Paying tax on a business sale

The sale of a business is counted by the Australian Tax Office as part of the business’s taxable income. Think of it as your parting ‘gift’ to the tax office!

The tax rate you pay on the sale of your business depends on the form it takes, with the two most commonly sold structures in Australia being sole traders/trusts and companies.

• Business sale tax for sole traders and trusts

For sole traders and trusts that distribute to individuals, the amount of tax you pay depends on the value of the business at sale. The tax rate is separated into two brackets:

• $90,001 – $180,000: a rate of $20,797, plus 37% on every dollar over $90,000
• $180,001 and above: a rate of $54,087, plus 45% on every dollar over $180,000

Both brackets also incur the Medicare levy fee of 2%.

• Business sale tax for companies

Tax on companies is usually between 25% and 30%, depending on base entity rules.

Capital Gains Tax

Capital Gains Tax (CGT) applies to the sale of all businesses in Australia, regardless of structure because a sale is regarded as a capital gain.

The ATO considers capital gains to be any profit that your business brings in by selling assets. CGT is the tax the ATO charges on that profit.

Therefore, selling a business for more than it was bought for is a capital gain and will be taxed.

Capital gains tax will vary depending on:

• The initial cost of establishing the business
• The sale price
• The businesses tax structure
• Possible tax concessions
• Total income earned over 12 months

Minimising your tax bill

As inevitable as taxes are, there are always ways to make sure you don’t overpay.

Small businesses have the most options available to apply for tax concessions. The ATO classes small businesses in Australia as:

• Having an annual turnover of less than $2 million
• Having net assets worth less than $6 million

If you are a small business, there are a number of concessions you may be able to apply for, including:

• 50 per cent capital gains tax reduction: If you have owned your small business for more than 12 months, you may be eligible for this deduction.
• 50 per cent active asset capital gains tax reduction: An active asset is an asset that has been in use for more than half the time that a business owner has owned them. A business clearly falls into that category, so falls into the eligibility for the 50 per cent active asset capital gains tax reduction.
• 15-year capital gains tax exemption: If you are over 55 and have owned the business for over 15 years, you may be eligible for a complete exemption if you are selling to retire.
• Retirement exemption: You can ignore up to $500,000 of the capital gains tax incurred if you are retiring. If you are under 55, you must place the capital gain amount into an allocated superannuation fund.
• Small business roll-over capital gains tax exemption: It may be possible to roll your capital gains tax over to a new asset. You even have two years to find the replacement asset.

Your lawyer and accountant can help you understand which of these you may be eligible for.

Asset sales or share sales

When you sell your business, you have the option of doing an asset or a shares sale:

• An asset sale means the sale of the entire business, including all physical assets.
• A shares sale is when you sell off enough company shares to move ownership to another business entity.

The best solution

You will always pay tax on a business sale, so the best way to make sure you don’t pay incorrectly is to seek professional help.

An experienced lawyer and accountant will help you understand all the options above so you can structure your business correctly to sell it. This may require several months or even years of planning but it will be worth it.

Don’t forget, there are many other steps involved with selling a business beyond being aware of tax. Your accountant and lawyer can help you ensure it is in great shape so you can sell quickly, easily and for a great price.

Need help to sell your business and maximise your profits? Contact LAL Law today.

Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.

Many business owners assume that becoming insolvent means liquidating. When this happens, a liquidator is appointed to sell off assets and repay debt, and the company must stop trading while this all takes place.

The good news is there are alternatives, and you can solve insolvency without liquidating. Here’s a rundown of your different options to resolve your situation and stay in business.

Pay your creditors

If you have fallen behind but the business is turning around, you may be able to arrange to repay the providers you owe money to. You could take out a loan or you may be able to negotiate a payment plan with the tax office (be aware you may be charged interest on your tax debt).

With the tax office, it’s essential you reach out and set up a payment plan before you start receiving penalty notices as a result of not paying your bills.

If you decide to take out a loan to repay your creditors, make sure you can make the repayments before you commit. You may be able to secure the loan against some assets, which will minimise the risk for both you and the lender.

Find a way to consolidate your debt

Speaking of loans, if you have several different accounts and credit cards that are overdue, a loan from the bank or another lender may make everything more manageable and lighten the load thanks to a lower interest rate. This might be a good time to review your current credit situation with a finance broker.

Raise capital

If an injection of funds will put things on the right track, you may be able to ‘lend’ to the business from your personal funds or find an investor who is willing to contribute financially in return for part-ownership or other compensation.

With this being said, you need to have confidence that you’re not just digging a deeper hole for yourself. Work with your accountant and financial planners to do some forecasting so you have an idea of what’s actually possible.

Did you know Apple was on the brink of bankruptcy at one stage? It was Microsoft that saved the day, by investing quite a few million.

Review your income and expenses 

It is very easy to say ‘just earn more money’ but a lot less simple to do so. However, with a combination of strategy, great people, good market knowledge and a product or service people want, you can reinvent your business model and get back on top.

You may need to do some deep diving into your finances to figure out what has gone wrong. There could be expenses you can eliminate, and you might have to let some people go but recovery is never impossible. Sometimes growing the business is not profitably and scaling back will help increase profits.

Marvel was in a terrible position in the late 1990s before it started making movies off the back of its popular comic book titles. Its partnership with Disney means it’s one of the most successful brands in the world.

Find a buyer

Many brands avoid going from insolvency to liquidation by selling to a larger company. This may be an option, especially if you have IP or products that are in demand.

If you decide to sell to cover the cost of your debts, you don’t necessarily have to do so at a ‘bargain basement’ price. Work with a legal and accounting team so you sell for fair value and do so in accordance with the law.

The benefit of selling your business is being able to repay your debts while your staff keep their jobs. The purchaser will take the responsibility of restoring client relationships and getting cash flow back in shape.

Make sure you discuss your Capital Gains implications with your accountant prior to any sale.

Solving insolvency without liquidating

The best thing to do if you’re facing overwhelming business debt is to get the advice of a professional. A specialist insolvency lawyer can help you explore every option, make the right decisions and come up with a plan so you can side-step liquidation.

Need help to make a call around insolvency and liquidation? Reach out to Legal Affairs Lounge today.

Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.

However, with the severe impacts of COVID diminishing, the Australian Tax Office is taking steps to start reducing the many billions (yes, billions) of dollars in tax debt. It will be looking to individuals, corporations and small businesses to recoup outstanding amounts.

As part of this, major credit reporting agencies have signed agreements with the ATO. The result of these agreements is that companies including CreditorWatch and Equifax will now be able to access and report tax default data.

What this means

Credit reporting companies are relied on by mortgage brokers and lending institutions like banks who want to assess an individual or business’s suitability for a loan.

These companies keep a ‘score’ on consumers and businesses, based on the amounts they owe, how many bills they have overdue and how often they make payments. When you apply for a loan, your credit score factors into the decision.

In the past, tax debt has not been included in credit scores. But this has now changed.

If you are a business owner who:

• Owes more than $100,000 in tax
• Has owed this amount for more than 90 days
• Is not engaging with the ATO to manage your tax debt
• Doesn’t have an active complaint with the Inspector-General of Taxation Ombudsman (IGTO)

It’s more than likely that lenders will be notified when you apply for a loan.

The types of business tax debt that will be captured into the tax debt disclosure threshold include:

• Income tax debts
• Activity statement debts
• Superannuation debts
• Fringe benefit debt
• Penalties and interest charges

As shared by Accountants Daily, “Equifax’s general manager commercial and property services Scott Mason said the data would be incredibly valuable to customers because tax debts were often the last “bill” that businesses paid.”

He added that, “Understanding a company’s tax information is a vital piece of the puzzle for organisations wanting to manage their credit risk in relation to new and existing customers.”

It does make sense for lenders to have access to a complete picture of existing debt when it comes to approving loans. Being better informed will reduce the risk of defaults and businesses ending up in additional financial strife.

What to do next

If your business has an outstanding tax debt of over $100,000 and you have been investigating the possibility of a loan, there are a few steps you can take.

If the amount you owe can’t be changed, you’ll need to engage with the ATO to work out a payment plan. Legal Affairs Lounge can negotiate this arrangement for you.  Having a plan in place will prevent the ATO from repeatedly following up with you, and you won’t end up with a default on your credit score.

Often, the ATO will treat tax debt like a loan. It will charge interest but be ok with you making monthly repayments. The challenge for you as a business owner is ensuring you’re not ‘kicking the can down the road’ and accumulating more tax debt while you try to pay off the outstanding amount. Again, having a good accountant can help you avoid this problem.

If your tax debt is out of control, you may need to investigate a restructure. The team at Legal Affairs Lounge can help you figure out the best way to reshape your business so your creditors are satisfied and you can continue to operate.

Don’t let tax debt impact your business. Get in touch with our team today.

Disclaimer: The content contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice.

There are a number of debt recovery options available to businesses in Australia. The most appropriate option will depend on the amount of debt owed, the debtor’s financial circumstances and your own business’ needs and preferences.

Take a look at some of the initial steps you can take, as shared by Legal Affairs Lounge’ team of debt recovery lawyers on the Legal Affairs :

Negotiate with the debtor

First things first, reach out and have a discussion. There may be a solution you can find between the two of you.

If you are considering negotiating with a debtor yourself, there are a few things to keep in mind. It is important to be firm but fair and to have a clear understanding of your legal rights as well as the debtor’s financial circumstances.

It’s better to be assertive, not aggressive. It is against the law to use intimidation tactics or threaten someone because they owe you money.

Send a letter of demand

You should first try to negotiate a payment plan or settlement. You could perhaps have your accountant or bookkeeper reach out on your behalf, or phone the account manager yourself to try to recover the funds.

If this doesn’t get results, you may send a letter of demand. The following tips will help you to write an effective letter:

– Make sure you are clear about the amount of money that is owed. Include any interest and legal costs that may be due.

– Give the debtor a reasonable timeframe to pay the debt. This will depend on the amount of money owed and the debtor’s financial circumstances.

It makes sense to work with a Legal Affairs debt recovery lawyer when creating a letter of demand. If the client has the money but is holding onto it, a letter like this can prompt rapid payment.

Apply for a court order

For an amount less than $25,000 your next step is a visit to the Queensland Civil and Administration Tribunal (QCAT). This was established to help businesses recover money owed without losing it to legal support costs.

If the amount is more than $25,000, you will need to work with a lawyer to handle the matter via the Magistrates, District or Supreme court.

Use a debt collection agency

Struggling to recover debt on your own? Working with a debt collection agency may be the best option for you. Your debt collector will follow some of the steps above but because they are familiar with the process they can be much more efficient and persistent.

If you are considering taking action to recover a debt, you should get advice from a debt recovery lawyer first.

If the debtor is insolvent

Many people believe that a company is absolved of its debts if it becomes insolvent or the Directors file for bankruptcy. This is not the case. In fact, part of the process a company must undergo to restructure or become insolvent involves negotiating with creditors. The business may need to sell some of its assets in order to resolve its debts and while you may not get every cent you are owed, at least you can recover some of the money.

It makes sense to work with a debt recovery lawyer if one of your clients is in financial difficulty and going through a restructuring period because it will help you resolve the issue with less stress.

Avoid bad debts

As much as possible, ask your creditors to pay for your services or products upfront. This will save you from having to chase unpaid funds.

In addition to this, make sure you have a clear contract in place or have your clients agree to terms and conditions in writing so bills are not disputed and you have a clear path to a legal claim.

Need help to recover business debts? Reach out to the Legal Affairs debt recovery lawyers at Legal Affairs Lounge today.

A business that has reached a point where it is experiencing significant financial trouble may have to go into administration. This happens to companies of all sizes every year, often because there are loans that can’t be paid off, suppliers who are owed money or because there is outstanding tax debt. The situation can be due to financial mismanagement or because something unexpected has happened to affect sales (which happened to many businesses during the pandemic).

If you put your business into administration voluntarily, it doesn’t necessarily mean the end of the road, just that someone independent has been brought in to investigate the financial situation in detail and make recommendations about the best way to move forward.

Take a look at the different types of administration and what happens when a company goes into administration.

Voluntary Administration

A company director or the board of a company can instigate the administration process themselves. This usually happens when debts are out of control and it is recognised that support is needed to identify the next best steps.

With voluntary administration, the Director or board will decide to appoint an administrator. The administrator will be brought in to:

• Meet with creditors (e.g. banks and lenders, suppliers, employees, contractors or the ATO)
• Analyse financial statements
• Review existing assets
• Go through relevant records and documents
• Prepare a report detailing the options to move forward

From there, the Director/s and board, if there is one, will make a decision to either sell the business, restructure, or liquidate and stop trading.

Involuntary administration

If a company owes a great deal of money to a number of secured creditors, these creditors can file an application in court that proves they are owed money and that the company is not paying its bills.

As part of this, ASIC (the Australian Securities and Investments Commission) must be notified.

After reviewing the case, the court will appoint an administrator. This moves the company’s directors ‘to the side’. They will no longer be able to make decisions relating to the financial matters of the company.

A liquidator will be appointed to itemise the company’s assets and determine their value before they are sold. Assets may include cars, vans, trucks, equipment and machinery, and property.

The resulting cash is used to repay the creditors. Following this, the company will no longer trade.

How to avoid involuntary administration

If your business is ‘solvent’, you are able to pay your bills on time and steadily reduce your debts.

The term ‘insolvent’ describes the opposite.

It makes sense for an insolvent business to go into administration voluntarily because this gives you more flexibility to make plans and recover. If a solution can’t be found to pay outstanding debts, liquidation may be the best answer. However, at least you will know you explored every option with the help of an administrator.

The benefits of going into administration voluntarily are:

• Directors are protected from legal action
• You can ‘buy time’ to figure out how to pay your creditors
• An administrator may be able to identify ways to recover
• You will be able to negotiate with creditors
• Your company can continue to trade

One of the first things to do if you are concerned your business is facing insolvency is to reach out to a lawyer who specialises in this area. If you’re on the Legal Affairs , get in touch with our team today.

Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for professional advice.

If you’ve had money difficulties but want to hold on to your business and feel like there is hope for a positive outcome, one solution can be to press ‘pause’ and get help to restructure your debt.

Here’s an explainer of simplified debt restructuring for Australian small businesses.

How does restructuring help to save businesses from insolvency ?

In the past, Australian businesses facing insolvency have had no choice but to be placed in the hands of a liquidator. Updates made to the law in 2021 mean that if your business has less than $1 million in debt, you have more options and the ability to stay in control while you figure out your next steps.

Referred to as ‘simplified debt restructuring’, this process requires your business to appoint a Small Business Restructuring Practitioner (SBRP) to help restructure your unsecured debts (outside of what you owe your employees) so you can avoid insolvency. If your company is in trouble, this practitioner will work with you and your creditors to come up with a plan that will take care of and relieve debts.

To be eligible for debt restructuring, your business must:

• Have less than $1 million in liabilities (not including employee entitlements)
• Be either insolvent or likely to become insolvent at some future time
• Be up to date with the payment of employee entitlements
• Be up to date with all tax lodgements (not necessarily tax debt)
• Not be under other restructuring or administration including a Deed of Company Arrangement or liquidation.

It’s also important that none of the business directors have gone through a similar process in the last seven years (your SBRP will check to ensure you meet all the requirements during your initial discussions).

If you are eligible for debt restructuring and your creditors agree to the proposal put forward, your business can continue to trade and avoid insolvency.

Your restructuring plan

Your SBRP will have 20 days to come up with a way to pay back the money you owe or absolve you of your debts. You’ll need to share all your financial information so this person can identify the best way to move forward.

Your plan may specify ‘cents in the dollar’ that you will repay or detail how you will return money to your creditors. It’s worth noting that additional debts incurred after you have enlisted the help of a restructuring expert will not be included in your plan.

Working closely with your SBRP, you’ll create a restructuring proposal statement, which includes a schedule setting out the company’s creditors, and the amount they are owed by your company.

Throughout the process, you’ll stay in control of your company and be able to trade. Once you have a debt restructuring plan, a proposal will be put to your creditors, who have 15 business days to accept or reject your suggestions.

Why restructure your debts?

It’s never a great feeling to reach out for support but if your company is in financial trouble, you can undergo the debt restructuring process and have temporary relief from the fear that your creditors can enforce their claims against you.

If more than 50 per cent of voters agree to the terms you put forward, your company can continue to trade and you can pay off your debts according to the plan.

How does a small business restructuring practitioner help?

The rules and process for restructuring debt are complex, which is why it’s mandated that you reach out for the support of a registered specialist.

Your SBRP will firstly confirm you are eligible for debt restructuring. Then they will get to know your business, prepare your plan and circulate it to your creditors, confirming at the same time that they believe you will be able to meet your obligations.

Once a plan is made, shared and agreed on, your small business restructuring practitioner manages the disbursement of payments to your creditors, based on the terms set out in the plan.

While simplified debt restructuring has saved many small businesses since 2021, there is fine print to be aware of. You can read more at treasury.gov.au or reach out to Legal Affairs Lounge for more information.

Disclaimer: The content contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice.