Selling your business

So…you’ve made the important decision to exit your business. Perhaps you have a buyer lined up, looking around for options, or you just want to stop trading. Don’t underestimate the work involved in this process.

Your decision is only step one. Step two should probably be having a quick chat with your accountant before making any important decisions and before signing on the dotted line.

If you’re selling the business, there are four common methods – transferring shares in a company, selling (only) the business assets, selling business operations as a whole (as a going concern), or simply cease trading.

Transferring shares in your company
Changes in shareholding
Selling assets
Selling the business as a whole
Ceasing operations
Wind up / liquidate
Expenses
Summary of tax considerations
Things you REALLY didn’t think about
Example
Short-cut FAQs
Before signing on the dotted line

Transferring the shares in your company

The owners of a company are the shareholders. Your company was set up with a certain number of shares allocated to one or more shareholders. These shares can be re-allocated in different ways:

  • If an existing shareholder wants to buy out the other(s), transferring the existing shares between the current shareholders is very straight-forward. Simply head into the Companies Office’s online system to change shareholders, use your RealMe login, and update as necessary.
  • If there is to be a new shareholder, your company needs to first register the shareholder with the Companies Office. Once the shareholder is registered, follow the online instructions here to update the share allocation held by each person. This includes the situation where the existing shareholder ends up with no shares.
  • If your company was initially set up with only one share, and the plan is for the company to have two or more shareholders, you’ll need to increase the company’s total shares. You can’t have half shares. This link sets out the process. 

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Changes in shareholding

Adding and updating shareholder allocations is easier than you may think. However, you shouldn’t go ahead without advice from your accountant. Changing shareholders may have important tax implications:

Losses available to carry forward

If your business has been making tax losses, you may have something called “losses available to carry forward.” These historic losses can be offset against future profits – this means you pay less tax in the following years than without them. However, if the shareholding changes, these losses could be wiped out, never to be used again.

Tax on any profit from selling your shares

Unless you’re in the business of trading shares, any profit should not be taxable.

Imputation credits

A change in shareholding, or winding down the company could impact imputation credits. Long story short, this could restrict the company’s ability to distribute full tax-paid dividends to its shareholders. 

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Selling assets

Sole traders and companies can choose to sell only the assets of the business. It doesn’t matter how the assets will be used by the purchaser – it’s literally out of your hands. 

If you claimed GST on the original purchase price of the asset, you need to pay GST on the sale price. The sale price should be included within Box 5 of the GST return.

Sale price must be market value – you can’t sell them to a mate for $1 to reduce GST.

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Selling the business as a whole

This means the company sells not only the assets, but the operations of the entire business. These intangible assets (cannot be physically touched) could include the list of the business’ clients or customers, suppliers used by the business, software programmes, and systems/processes already in place to keep the business operating.

This is called the sale of a going concern. It’s similar to where you see a restaurant advertising that it’s under new management. There is no immediate or obvious impact on customers – the restaurant business just carries on as usual but with a different owner.

  • Where both parties are registered for GST, the sale of a going concern is likely to be zero-rated for GST purposes, but this needs to be made clear by each party and signed off
  • The market value of each asset, or group of assets, must be included in the agreement

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Ceasing operations

You may just decide to stop trading…but it’s not as simple as that. Formal processes are still needed:

  • The unsold assets can’t just sit there collecting dust. They’ll either have no value or can’t be used, or taken over by you. We need to ‘sell’ the assets to you at market price.
  • A final GST return needs to be prepared – this accounts for the assets sold and any adjustments your accountant may have identified when preparing the financial statements.
  • If the business is an employer, it will need to perform the last payday filing for employees 
  • Cancelling your GST and employer registrations will be the next step.
  • After (and only after), a company has paid all amounts owed to Inland Revenue, can the company apply for a ‘no objection’ letter from Inland Revenue – you’ll need this if you’d like the Companies Office  to remove the company from its register
  • Of course, the company can choose to remain “open”. The Annual Return must still be filed each year, and the annual fee paid (less than $50); you’d also inform Inland Revenue that the company is inactive.

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Wind up / liquidate

If the company is liquidating due to insolvency, a third-party liquidator will probably be appointed to deal with the whole process. 

Where the company is to be wound up voluntarily, you need to consider which of the sections above may apply to your situation.

A company cannot be removed from the Companies Office register unless there’s a letter of no objection from Inland Revenue

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Expenses

A common question we receive is whether or not certain expenses can be claimed for tax purposes.

Preparing for the sale
  • Legal fees and other costs relating to the selling or transferring of shares – not deductible as this is a transaction between two individuals.
  • Upgrading assets prior to sale – if the costs make the asset more valuable than when you purchased it, then it’s not deductible
  • Painting, redecorating, removing rubbish and generally ‘prettying-up the place ‘ – these expenses are deductible
  • Advertising and marketing – not deductible, but can be offset against the sale price for tax purposes*
  • Break fees for early business loan repayment or restructuring – deductible
After trading ceases
  • Fees for your accounting system – deductible until the final set of financial statements are prepared
  • Accounting fees – deductible for the preparation of the final financial statements and tax return(s)
  • Legal fees (except for the sale of shares) –  deductible up to a maximum of $10,000.
  • Commission paid or brokerage fees – not a tax deductible expense, but can be offset against the sale price*.

* When the sale price is reduced, your assets are sold for a lower value. This can increase a loss you make on the sale, or it can reduce the depreciation recovered. It’s getting to the same result in a different way.

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Summary of tax considerations

GST

A final GST return needs to be filed. Sounds simple, but it’s not. You need to account for the sale of business assets, including those which remain unsold but will be used by you. You also need to add any adjustments your accountant may have identified when preparing the financial statements.

Income tax


Companies 

  • File a final company tax return
  • Pay all outstanding income tax
  • Apply for a ‘no objection’ letter from Inland Revenue – you’ll need this before the Companies Office removes the company from its register
  • You can inform Inland Revenue that the company is inactive – they won’t send reminders to file tax returns and therefore won’t impose late filing penalties

Sole traders

  • You continue as normal and your tax return won’t include business income going forward
  • If you only receive PAYE-paid wages, interest, and dividends, you may not even need to file a tax return
Employers

Entities registered as employers with Inland Revenue need to file their final payrun, and then should de-register.

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Things you REALLY didn’t think about

  • Overdrawn shareholder current account – this is where you’ve taken out more from the company than you’ve given
  • Deemed dividend distribution
    • Applies only if the company ceases trading, not if is wound up or liquidated
    • Distributing any asset to a shareholder (including cash) without the shareholder paying market value, could mean the company has distributed a “deemed dividend*” and have serious tax implications

      * A company declaring a normal cash dividend needs to follow specific tax procedures, and pay dividend withholding tax to Inland Revenue. If the company gives you assets (instead of cash), it must be treated the same way.

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Example

Let’s consider the possibilities where a company has 100 shares and he owns 60% of them (his wife owns the remaining 40%). The company operates as a farm and the farmer wishes to exit the business. The farm comprises one section of land with several outbuildings and the main home. The business also has livestock and off-road vehicles.

Transfer company shares

Here, nothing changes in the way the business operates. Shares can be transferred or reallocated to other shareholders. 

Sell the assets

The company could sell the livestock and/or the land and/or the off-road vehicles. It could even sell these to different people. After selling the assets, the company ceases trading. Hopefully the sale results in excess cash which can be distributed to the shareholders.

The transfer of the business may be performed by changing the company’s shareholding as mentioned above. Another option is for the new owner to conduct the farming business in a separate company, or even as a sole trader.

The same also applies to sole traders – sell the assets and stop trading.

Sell the business as a whole

This means the company sells not only the assets, but the operations of the entire business. This is called the sale of a going concern. It’s similar to where you see a restaurant advertising that it’s under new management. There is no immediate or obvious impact on customers or suppliers – the restaurant business just carries on as usual but with a different owner.

The transfer of the business may be performed by changing the company’s shareholding as mentioned above. Another option is for the new owner to conduct the farming business in a separate company, or even as a sole trader.

What’s the difference?

There is a difference between selling the assets and selling as a going concern. In the latter, the farm continues to operate as normal. The new owner doesn’t need to spend time finding buyers of the livestock or looking for the best livestock supplier. The accounting system, website, and email address have already been set up. Even the business logo is there. 

The buyer may decide to change any of these down the track, but for now, the business continues to generate money as normal.

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Short-cut FAQs

Before signing on the dotted line…

  • For selling the business as a whole, we recommend you ask your lawyer to review the sale and purchase agreement
  • Selling anything that involves a trust can become very messy – again, seek legal advice
  • Inform your accountant – they will advise the best way to exit your business from a tax perspective

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Too often, advice is not sought before formalising the transaction. Disagreements after the sale could become significant and very detrimental to cash and your tax liability. Here at Beany, we love to make your life easier, so if you’re considering selling or ceasing your business, get in touch and we can work out the most straightforward way to help you out.

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