When your client first went into business, either buying an established enterprise or starting from scratch, probably the last thing on their mind was the day they would close the door for the last time. Client calling time out business? The tips and traps
But it’s no use ignoring the inevitable, as one day they will leave their business – whether through pursuing another career, retirement, or even due to health reasons. It’s important to know what’s involved, and having a succession or exit plan can go a long way to smoothing the transition.
Tax loose ends
The sale of a going concern, as a continuing business, is generally GST free. But if in the process clients separately sell “capital assets” (which are usually not intended for sale in the ordinary course of business but kept for the purpose of earning revenue), these will need to be accounted for.
You may be able to claim a deduction for many capital expenditures the client makes in the process of winding-up the business, such as legal costs for terminating employees, or removing fixtures (that aren’t depreciating assets) or site rectification costs.
Capital gains tax will come into play of course, but don’t forget to account for any capital losses that may be lurking on the books. There are however various tax concessions available for the small business owner (see the details here), and if they are retiring, the profits from the sale of assets may be CGT-free.
If the business is being run from a company structure, getting the money out can also be problematic. You may need to engage a liquidator on behalf of your client to get the money out tax effectively.
Retirement exemption on sale of business assets
Your client’s superannuation fund could get a helpful boost if they’re selling a small business. If the proceeds of the sale of a business CGT asset are rolled over into a super fund, the capital gain is exempt from CGT – and this “retirement exemption” (one of the small business concessions mentioned above) applies to the gains made on the sales of as many business CGT assets as they like, subject to a total lifetime limit of $500,000.
It’s a way of encouraging clients to prepare for their own retirement. And if they’re at least 55 years old, they don’t even need to put the money into a super fund to qualify for the tax exemption.
Taking care of staff
Of course ending a business, or selling it, will affect any staff they have employed. If they’re selling the whole business as a going concern, staff may be able to keep their jobs, but if your client is closing shop employees will need to know of all entitlements and payments owing. There are still legal obligations as an employer, which may include fringe benefits tax, PAYG instalments, compulsory super and perhaps eligible termination payments (ETPs), which are taxed differently to other types of payments made to someone who stops working for a business. There is an ETP calculator available that may help.
Registrations to cancel
Ultimately, as part of the process, you need to cancel your client’s registrations with the ATO when they sell or cease trading. They are required to notify the Australian Business Register within 28 days of ceasing business to close their ABN. You can click here to apply to cancel registrations for the following:
- Australian business number
- goods and services tax
- fuel tax credits
- luxury car tax
- pay-as-you-go (PAYG) withholding.
But before cancelling the ABN, it’s best to make sure all activity statements are lodged (even if there is “nil” to report) as well as PAYG withholding amounts. GST registration needs to be cancelled 21 days from ceasing trading, and the final activity statement will need to show any sales or purchases for that period (including the sale of the business, if applicable).
Tying off all the loose ends can be a process, and while it may seem impossible to cover absolutely every topic that will need your attention, here is a checklist to tick off (if applicable) when selling or closing your client’s business.
As noted, one of the keys to tax effectively winding up a family business is access to the small business CGT concessions and getting the money out.
Tax & Super Australia hosted a webinar “Winding up the Family Company” on October 26. A recording is available on our recordings page.