Income tax Dates
Selling a business through a sale of its shares is often less complicated than selling business assets – a share price is agreed on for the shares and payment is made with no need to consider asset tax valuations.
Shares are personal property and when a sale involves the shares in a company you operate a business through gains are usually non-taxable. The amounts may be taxable if you:
- originally bought the shares for resale instead of long-term investment
- deal in shares.
In these 2 situations, any profit from the share sale will be taxable, and you will need to include it as income in your tax return.
This page covers tax-related issues or topics that can come up when selling shares in a business. We recommend you speak to a professional tax advisor about your specific situation.
These are when part of the purchase price is paid over time, depending on how the business performs.
Whether earn-out payments are taxable depends on the terms of agreement , so it’s worth getting professional tax advice.
In general, if the earn-out payments specifically relate to sales and services provided and the performance of the business, then they’re taxable. The seller would need to declare income and the buyer can claim an expense each time a payment is made.
If the payments only relate to the share sale price, then they’re usually not taxable.
Interest and other financing costs related to the sale and purchase of a business can usually be claimed as an expense.
The sale of shares is usually GST exempt, meaning it's not subject to GST and is not included in a GST return.
Currently, if a company has more than a 34% change in shareholder ownership due to the sale of shares, it cannot carry forward imputation credits it holds at the time of sale.
This includes consulting fees, brokerage and other related costs. As most business share sales are capital (non-taxable) then the related costs usually cannot be claimed as an expense.
However, you can claim up to $10,000 of legal expenses in a tax year.
Whether these are taxable depends on what the warranty or indemnity is in relation to.
For example, if a warranty given by the seller is in relation to a taxable asset, then the payment made by the buyer to the seller to obtain the warranty is likely to be taxable and able to be claimed as an expense by the buyer.
You may want to speak to a tax professional about your situation.
An example of a restrictive covenant is when the buyer pays the seller not to open a similar business in the same area.
These payments are generally taxable to the seller, while the buyer can claim this cost as an expense in their income tax return.
A restricted covenant payment you receive when selling a business may not be taxable. This includes when you sell all your shares in a business, but other shareholders retain their shares.
A company will need to meet the requirements of either the shareholder continuity test or the business continuity test in order to carry forward tax losses made before it sold the business shares.