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CGT sale of business and winding up company

Discussion in 'Accounting, Tax & Legal' started by smallbiz, 29th Mar, 2010.

  1. smallbiz

    smallbiz New Member

    29th Mar, 2010
    I'm hoping someone can help me understand the following tax implications. Not sure if I understand correctly.

    Eighteen months ago I sold a business that was part of my pty ltd company. I am being paid in instalments with the final instalment due soon. I owned the business for less than 15 years. I am under 55 years of age.

    I realise I can roll the capital gain into another venture, however, I am really wanting to just get my cash out of the company which sold the business and have the money in my pocket.

    I sold the business for $200K. As yet the company has not paid any CGT/tax on these funds.

    If I choose to wind up the company - does the company first have to pay CGT on 100K (allowing for a 50% exemption)?

    To then get the money out of the company when it is wound up do I have to personally pay CGT again on the money that comes to me (allowing for 50% then 50% exemption) from the winding up?

    Does that mean-

    Company pays 30K CGT (200000 x 50% x 30% company tax), which then reduces the 200K to 170K?

    To take the 170K out of the company when it is being wound up, do I think have to pay CGT on $42,500 (170,000 x 25%). At my tax rate 40.5% = $17212.50?

    Is this how it works?

    If I rolled the 100,000 that is eligible to pay CGT (from the original 200K) into another venture, could I then take the remaining 100,000 out of the company when I wind it up ... paying CG tax on just $25000? If I put this $25,000 direct into superannuation would I end up not paying any CGT except for the portion owing on the 100K in the new venture. Would this not be payable until the new venture was sold?

    Thank you in advance. My head in swimming!
  2. Waimate01

    Waimate01 Well-Known Member

    26th May, 2008
    Sorry to be the bringer of bad news, but companies do not get the 50% exemption.

    But before you get too despondent, consider that the top marginal rate is 46.5%, half of which is 23.25%, while the company rate is 30%. So although there's a difference, the difference isn't as huge as you might first feel in the punch in your gut.

    Further consider that if you're firmly in the top tax bracket and plan to invest your money in <whatever>, then maintaining your cash within your company rather than winding it up effectively gives you a low tax regime in which to compound. The benefits of being able to compound in a lower tax regime go a very long way towards closing the gap between 23.25 and 30%. Indeed, depending on your assumptions it can work out better.

    But if you want to get the cash out of the company, there's probably a couple of options. Have a look at your balance sheet. If you have spare franking credits, pay yourself a fully-franked dividend. If you have "share capital" on your balance sheet, you can probably do a "return of capital" which is completely tax-free. You can do either of those things without winding up the company.

    So, to summarize
    1. No 50% CGT exemption when the company sold the business
    2. No 50% CGT exemption when you wind-up the company because you're not selling it
    3. Leaving the proceeds inside the company may not be such a bad thing, depending on your goals
    4. Depending on your balance sheet, there may be ways to extract the cash in a tax-effective way.
    5. Speak to your accountant :)

    -- Ian
  3. MattR

    MattR Well-Known Member

    23rd May, 2007

    What you want to look at are the SBE CGT Concessions

    Capital gains tax (CGT) concessions for small business - overview

    Whilst companies do not obtain the General CGT Discount, they may be able to access the 50% Active Asset concession, Retirememt Concession, 15 Year Concession or Rollover.

    One problem with the SBE CGT Concessions for companies (and their shareholders) is that it can be hard to get the money out of the company in a tax effective way for the end user, the shareholder.

    Speak with an accountant, its a complex little area but it pays to get it right.
  4. Superman

    Superman Well-Known Member

    6th Nov, 2007
    Gold Coast, QLD
    Sounds like pretty good advice right there ;)

    Not all accountants know about the concessions in detail either.

    Good luck