Getting the timing right to exit your small business

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In the world of small business, timing is incredibly important for success. When you are planning to exit your business, getting the timing right is critical to maximising your financial position.

According to the Australian Bureau of Statistics, businesses with turnover under $2 million made up 98.5 per cent of Australia’s 243,383 business cancellations in 2021-22 (reflecting events such as business closure, sale or structural change).

While each small business owner’s situation will differ, all will need to factor in how time will play a role: time to properly plan and start working towards a succession strategy, the timing around when the exit occurs and how this will affect tax liabilities such as capital gains.

A number of economic changes can take place in the lead-up to your business exit.Credit: Louie Douvis

Whether selling a business to another party or handing over ownership or management to younger family members, there are many complex financial, structural and operational aspects to consider.

Working through the emotional decisions, as well as the practicalities, over a long period of time can mean a number of economic changes can take place in the lead-up to your business exit.

These shifts before an eventual sale or transition could then affect business valuation and marketability.

In cases like these, current owners may decide to complete a partial sale or ownership transition, to help the new management deal with the challenges at hand while waiting for conditions to potentially improve.

Conversely, a succession plan may need to be sped up to make the most of favourable market conditions, or unfortunately, due to health considerations.

Timing your exit to help boost your super

Selling a business asset – such as property (including a business premises or vacant land), business-related shares or units, or intangible assets like leases or licenses – as part of a succession strategy attracts capital gains tax, unless it was acquired before September 20, 1985.

However, depending on the circumstances, there is a range of small business CGT concessions that can reduce the tax payable on these, if you meet other basic criteria such as a turnover of less than $2 million.

Two such concessions for small businesses – the 15-year exemption and the retirement exemption – also have the benefit of being able to contribute proceeds to superannuation, up to a lifetime CGT cap which in the 2023-24 income year is $1,705,000.

As the name suggests, owning your business for at least 15 years is key to the 15-year exemption, as is being aged 55 or older and the sale being connected with your retirement.

For the retirement exemption, up to $500,000 of capital gain can be treated as tax-free if it is placed into super, although those aged over 55 could also take it as a lump-sum employee termination payment.

Tapping into other CGT concessions

If time is not on your side in relation to the 15-year exemption or retirement exemptions, other CGT concessions are available.

It’s also important to note that depending on your circumstances, you may be eligible for multiple concessions.

The 50 per cent active asset reduction allows you to treat 50 per cent of the capital gain as tax-free, meaning you are taxed only on the remaining half.

Meanwhile, the small business rollover lets you defer the capital gains from the sale of an active asset if you will be purchasing a replacement asset or improving an existing one.

This could apply, for example, if you are exiting one business to buy another, as you can attach the capital gain on the former business sale to the new active asset purchase and defer the tax liability until this is sold.

Here’s an example of how this works in practice: a couple, aged 60 and 61, sold a family business for $5 million which they bought for $1 million 10 years ago.

They are eligible to apply the 50 per cent CGT discount, which brings the taxable gain down from $4 million to $2 million.

In addition, they can apply the retirement exemption and roll over the remainder of the funds into their respective super funds (up to a lifetime limit of $1,705,000 each) and reduce their tax liability as a result of the sale of the business.

Grace Bacon is the director of RSM Financial Services Australia (AFSL 238 282), advising clients on wealth management, retirement planning and succession planning.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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