Essential tax considerations when closing or selling your business

Closing or selling your business can be a complex process, especially when it comes to tax obligations. It’s essential to follow the right steps to avoid complications and ensure a clean resolution of any outstanding tax liabilities or reporting requirements. Below, we’ll cover the key tax considerations for different business structures, what you need to do before shutting down or transferring ownership, and how to handle the paperwork.

1. Different structures, different tax outcomes

The tax implications of closing or selling a business differ depending on its legal structure:

Sole traders: The owner retains all assets and is responsible for paying personal tax on any profits. This means careful accounting is essential to ensure all tax obligations are met.

Partnerships: Profits or losses are typically shared according to the partnership agreement. Partners need to settle any final distributions, and each partner must report their share on their individual tax returns.

Companies: In the case of a company, after paying off all creditors and liabilities, any distributions to shareholders may be subject to tax. It’s important to communicate with shareholders about their tax obligations arising from distributions.

Understanding these distinctions is crucial for effective financial planning.

2. Selling your business: Key steps and tax implications  

Deregistration and ownership transfer: Unlike closing, selling often means deregistering or transferring your business’s documentation, assets, and obligations to a new owner. This includes legally transferring your Australian Business Number (ABN) and updating business registration details to reflect the change in ownership. In some cases, deregistration may still apply if the business structure will change under the new ownership.

Licenses and permits: If your business operates with specific licenses or permits, you’ll need to either transfer or cancel these, depending on the buyer’s plans. For instance, professional licenses in regulated industries, such as healthcare (pharmacy or medical practice licenses) or hospitality (liquor licenses), often require additional permissions or certifications to be transferred to a new entity.

Handling assets and liabilities: Sellers must determine whether they’ll transfer all assets or only some. In the case of a “clean break” sale, the buyer acquires all assets, and the seller exits entirely. In partial transfers, only specific assets (like equipment or intellectual property) change hands, which may alter tax treatment on assets retained by the business. The nature of the sale also impacts capital gains tax (CGT) reporting requirements.

Negotiating seller involvement: In large acquisitions, the buyer and seller often negotiate how involved the seller will be during the transition. Some sellers may agree to a limited period of support or consultation, while others make a full exit. The seller's involvement should be clearly defined in the sale agreement, as it affects the legal, tax, and operational aspects of the transaction. If the business has employees, the seller may also negotiate certain conditions regarding staffing practices or severance.

Selling a business comes with a range of tax and legal complications. Properly structuring the sale and getting professional advice can help minimise tax impacts and ensure a smooth transition for both parties.  

3. Understanding section 47 of the Income Tax Assessment Act 1936  

One of the key pieces of legislation to consider when closing a business is Section 47 of the Income Tax Assessment Act 1936. This section deals with the treatment of distributions made upon closing, which may be deemed as dividends.

Certain distributions to shareholders could be included in their assessable income, potentially leading to unexpected tax liabilities. For example, if you distribute business gains as a final payment, they can be considered dividends and impact your personal tax liability. It's important to consult with a tax professional to ensure you understand how this applies to your situation.

For reference, here's the full text of Section 47.

4. GST considerations  

Addressing your Goods and Services Tax (GST) obligations is crucial when closing your business:

Final GST lodgements: Your final Business Activity Statement (BAS) must be filed, and all GST obligations must be paid. Any sales made before your business closure need to be accounted for.

Cancellation of registrations: As you wind down your operations, you will need to cancel your Australian Business Number (ABN) within 28 days and your GST registration within 21 days. This step is essential to ensure you are no longer liable for GST reporting. For more details, review this guidance on GST when closing a business from the Australian Taxation Office (ATO).

5. Record keeping  

Even after closing your business, maintaining proper records is critical. You are required to keep business records for at least five years. This is essential for any potential audits or if you need to reference financial information later. Ensure that all records are well-organised and easily accessible.

6. Liquidators and company closures  

When closing a company, engaging a liquidator is often necessary. A liquidator is a qualified professional appointed to manage the winding-up process of a company.

Liquidators must be registered with the Australian Securities and Investments Commission (ASIC), and their registration should be renewed every three years to maintain their professional standing.

Capital gains tax implications  

It’s important to note that if a liquidator sells the company’s GST assets, any capital gains or losses from these transactions will be attributed to the company itself, not the liquidator. This distinction can significantly impact the company’s final tax obligations and overall financial outcome.

Here's more detailed information about the role of liquidators.

7. Final payroll obligations  

Before officially closing your business, ensure that all staff have been paid their final wages, superannuation contributions, and any other entitlements. This includes lodging your final Single Touch Payroll (STP) report to ensure compliance with payroll obligations. Failure to do so may lead to complications or penalties from the ATO.

8. Managing authorisations with the ATO  

Don't forget to manage and update your authorisations on the ATO portal. Keeping your authorisations current is vital for any ongoing tax obligations or communications.You can refer to the authorisation manager to learn more about managing your authorisations effectively.

Final thoughts

Closing or selling your business can be a daunting task, particularly with the myriad of tax considerations involved. It's highly advisable to work with a tax professional who can help you meet all legal requirements, minimise potential tax liabilities, and ensure that you’re fully prepared for a seamless transition.

For comprehensive guidance, the ATO offers extensive resources on closing your business. With careful planning and professional assistance, you can ensure a smooth transition and avoid unexpected issues.