Selling a business is a major financial decision, and understanding the tax implications is crucial. Many business owners ask: Does selling a business count as income? Under Australian tax law, the proceeds from selling a business are typically classified as a capital gain rather than ordinary income.
However, some parts of the sale—such as trading stock or depreciating assets—may be taxed as income.
The way your business sale is taxed depends on several factors, including the structure of your business, the assets involved, and how the sale is structured. Some elements may qualify for capital gains tax (CGT) concessions, while others may be subject to goods and services tax (GST) or income tax.
This guide provides a comprehensive breakdown of how business sales are taxed in Australia, what obligations arise, and when professional advice is necessary to ensure compliance and minimise tax liabilities.
Does Selling My Business Count as Income or a Capital Gain Under Australian Tax Law?
Under Australian tax law, selling a business is generally treated as a capital gains tax (CGT). However, there are exceptions where parts of the sale may be classified as income.
Capital Gain vs. Ordinary Income
- Capital Gain: If you sell the business as a whole or dispose of significant assets like goodwill, property, or shares, the profit is subject to capital gains tax (CGT).
- Ordinary Income: If you sell trading stock, depreciating assets, or receive certain payments under a contract (such as earn-outs), those amounts might be treated as ordinary income and taxed at your marginal tax rate.
Key Factors That Determine Classification
- Nature of the Asset Being Sold: Business assets such as goodwill, intellectual property, and real estate are generally treated as capital gains.
- Business Structure: If you operate as a sole trader, company, or trust, different tax rules may apply.
- How the Sale Is Structured: Some agreements split payments over multiple years or include performance-based payments, which may impact tax treatment.
For most business sales, a significant portion of the proceeds will be classified as a capital gain rather than ordinary income, but it’s important to review each component separately.
Also Read: Understanding How to Sell a Business in Australia Legally
What Tax Obligations Arise When I Sell My Business in Australia?
When selling a business, tax obligations will vary depending on the structure of the sale and the assets involved. The key taxes to consider include capital gains tax (CGT), goods and services tax (GST), and income tax on specific assets.
Capital Gains Tax (CGT)
Capital gains tax applies to the profit made from selling a capital asset. However, there are several ways to reduce CGT liability, including:
- Small Business CGT Concessions: If your business meets certain criteria, you may qualify for CGT relief, such as the 15-year exemption, 50% active asset reduction, retirement exemption, or rollover relief.
- General CGT Discount: Individuals and trusts that own a business for more than 12 months can receive a 50% discount on capital gains.
- Rollover Relief: If you reinvest the proceeds in another business, you may be able to defer CGT under certain conditions.
Goods and Services Tax (GST)
The sale of a business may attract GST, depending on whether the sale is classified as a “going concern” or if specific assets are subject to GST. A GST-free sale of a going concern is possible if:
- The business is sold as an ongoing operation, including assets, staff, and systems.
- Both buyer and seller are registered for GST.
- The contract specifies that the sale is a going concern.
Income Tax on Trading Stock and Depreciating Assets
Certain business assets are taxed as ordinary income rather than capital gains, including:
- Trading Stock: If you sell inventory or raw materials, the value is treated as assessable income and taxed accordingly.
- Depreciating Assets: Machinery, equipment, and vehicles are subject to income tax adjustments based on their written-down value and sale price.
Understanding these tax obligations can help avoid unexpected liabilities and ensure proper tax planning when selling your business.
Also Read: Understanding Capital Gains Tax on Business Sale: A Comprehensive Guide
How Is the Sale Price of a Business Allocated Between Income and Capital Gains?
When selling a business, the total sale price is often split across multiple asset categories, each with different tax treatments. Proper allocation is essential to ensure accurate tax reporting.
Breakdown of a Business Sale Price
Goodwill and Intellectual Property: Capital Gain
The value of goodwill (brand reputation, customer base) is subject to capital gains tax (CGT).
Business Premises (Property and Land): Capital Gain
If owned by the business, the sale of property is considered a CGT event and may qualify for tax concessions.
Trading Stock (Inventory and Raw Materials): Ordinary Income
Proceeds from selling stock are taxed as assessable income at your standard tax rate.
Depreciating Assets (Equipment, Machinery, Vehicles): Income Tax Adjustment
The tax is calculated based on the difference between the written-down value and the sale price.
Lease Agreements and Contracts: Varies Based on Structure
Some leasehold interests may be taxed differently, depending on the agreement.
A carefully structured business sale agreement will specify how the price is allocated, affecting both buyer and seller tax outcomes. Seeking legal and tax advice ensures that the allocation is fair, compliant, and tax-efficient.
When Should I Seek Professional Legal and Tax Advice for My Business Sale?
Selling a business involves complex tax considerations, legal contracts, and financial risks. Seeking professional advice before finalising a sale agreement can help you:
- Reduce tax liability by applying for CGT concessions and structuring the sale effectively.
- Ensure compliance with ATO regulations, GST rules, and tax reporting requirements.
- Protect your interests by drafting a legally sound sale agreement that clearly defines price allocation, warranties, and liabilities.
- Avoid legal disputes with buyers regarding asset ownership, financial disclosures, or contract terms.
It is advisable to consult with:
- A business lawyer to review contracts, agreements, and legal obligations.
- A tax accountant to assess the tax implications and apply for CGT relief.
- Professional guidance can help you maximise financial benefits while ensuring a smooth and compliant business sale.
Selling a Business? Get Expert Legal Advice Today
Selling a business is a significant decision that comes with tax obligations, legal complexities, and financial risks. Whether you are concerned about capital gains tax, GST, or structuring your sale efficiently, having the right advice is crucial.
At Walker Pender, our experienced business sale lawyers provide expert guidance on contracts, tax implications, and compliance requirements to protect your interests. Contact us today for professional legal advice and ensure a smooth and successful business sale.
