Deal structuring (seller)

There is a multitude of specific tax issues to be considered, whether you sell shares or assets.

Deal structuring seller

Chapter image Deal Structuring (seller)

Exit issues: Share sale

Exit considerations for a Vendor (share sale)

Capital gains tax

The disposal of an asset that is held on capital account will generally result in a capital gain or loss for the Vendor. Generally something will be taken to be on capital account when it is held for the medium- to long-term for the purpose of deriving income. A short-term hold for the purpose of sale will generally not be on capital account. This can have impacts on the tax treatment in most instances.

The corporate tax rate on capital gains is 30%, subject to the exemptions below.

For resident individual and superannuation funds, the CGT discount could be available to reduce any capital gain by 50% or 33.3% respectively.

Taxable Australian real property

Foreign residents can generally disregard any capital gains or losses made on the disposal of shares that are not an indirect taxable Australian real property interest – t hat is, where the land or land-related assets of the company being sold are less than 50% of total assets based upon values, broadly, at the time of sale.

There are certain withholding tax arrangements and representations that may be required to be given by the vendor as noted below.

Double tax agreements

To the extent that the disposal is treated on revenue account, where a foreign resident Vendor has the benefit of an applicable double tax treaty (DTA), the Vendor should be protected from Australian tax where it does not have a "permanent establishment" (broadly, a fixed place of business) in Australia (ie. Article 7 of most DTAs in relation to business profits). As Australia does not tax capital gains of foreign residents where the company does not primarily hold land assets, the application of the DTA to sale proceeds is often limited to where the relevant gains are of a revenue nature (eg. most private equity style gains).

Source of income

If the foreign resident Vendor is a resident of a country that does not have a DTA with Australia, a revenue gain could be taxable in Australia if the source of that gain is an Australian source.

For the Vendor, to determine the source of a gain, the Commissioner will have regard to all of the facts and circumstances of case. This will include:

  • the consideration of the activities undertaken in relation to the acquisition of the particular asset;
  • the activities performed to enhance the asset's value during the holding period; and
  • the activities undertaken in relation to the disposal of the asset.

The key part of this analysis is the location of whether these activities are performed, and where the contracts and agreements are entered into, including the form and substance of those agreements.

Non-resident CGT withholding

A Buyer is required to withhold and remit to the Australian Taxation Office 12.5% of the gross consideration for the shares unless they are provided with a Vendor declaration stating that the shares are not an indirect Australian real property interest or that the Vendor is an Australian resident for tax purposes. Accordingly, the Vendor should provide this information to the Buyer prior to Completion of the transaction to avoid an amount being withheld from the sale proceeds.

A Vendor can also apply to the Australian Taxation Office for a variation to the 12.5% withholding if the 12.5% withholding is too high compared to the actual Australian tax liability on the sale of the shares.

Goods and Services Tax

The sale of shares is usually not subject to GST. A common query that arises for the Vendor is the availability of input tax credits to recover GST incurred on transaction costs relating to the share sale – this will depend on various factors such as the types of transaction costs incurred and whether the sale is to a local or foreign Buyer.

Stamp duty

No Australian stamp duty issues should arise for the Vendor in a share sale. Any landholder duty if payable in any State or Territory will be payable under the relevant legislation by either the Buyer or in some cases by the "target" entity on a joint and several basis. Having said that, it is usual for the sale documentation to provide that the Buyer will be liable for any stamp duty in respect of the acquisition.

“ A seller's exit strategy will be affected by multiple tax considerations. ”

Exit issues: Asset sales

Exit considerations for a Vendor (asset sale)

Purchase price allocation

In an asset sale scenario, both the Vendor and Buyer will be interested in the purchase price allocation which allocates the purchase price across the assets that are being disposed. This may be relevant for the Vendor where there is a different tax outcome for a particular asset compared to another asset.

Taxable Australian real property

Consistent with a share sale, foreign residents can generally disregard any capital gains or losses made on the disposal of a CGT asset that is not taxable Australian real property.

Permanent establishment

If a foreign resident held an asset through a permanent establishment in Australia, any gain on the disposal of the asset should be taxable in Australia at 30%. A capital gain cannot be disregarded where the asset is held through an Australian permanent establishment even if the asset is not taxable Australian real property.

Non-resident CGT withholding

Consistent with the share sale process, a Buyer is required to withhold 12.5% of the gross consideration (net of any GST input tax credits for the Buyer) in relation to the asset disposal unless the Vendor provides a clearance certificate from the Australian Taxation Office stating that the Vendor is an Australian resident. Importantly, a Vendor cannot provide a declaration to the Buyer that the Vendor is an Australian resident if the asset is taxable Australian real property for an asset sale.

A Vendor can also apply to the Australian Taxation Office for a variation to the 12.5% withholding if the 12.5% withholding is too high compared to the actual Australian tax liability on the sale of the asset.

Goods and Services Tax

The application of GST will depend upon the nature of the asset(s) sold. The sale of a business by way of an asset sale may qualify as a "supply of a going concern" (SOGC) that is GST-free (Australian zero-rated). Where SOGC treatment does not apply, the sale of most assets would be expected to be subject to GST – though a Vendor would need to assess this by reference to each asset and the purchase price allocation.

The sale of Australian real property can give rise to different GST outcomes:

  • the sale of commercial property (eg. office towers, industrial property) and vacant land is generally subject to GST, though leased commercial property can constitute a GST-free SOGC;
  • farmland (eg. pastoral and forestry land) is often sold as GST-free, but will be subject to GST where specific requirements are not;
  • generally, the sale of "new" residential premises and vacant residential land is subject to GST and are also subject to rules requiring the Buyer to withhold GST from the purchase price. The sale of existing residential premises is usually not subject to GST.

Complexity and disputes can arise relation to the GST treatment of sales of real property. Vendors selling to a property developer should also be aware that the GST treatment of land can be a key factor to the purchaser's business case and hence a key commercial issue for the transaction.

Stamp duty

All jurisdictions levy duty on land assets (including interests in land). In South Australia, this is limited to residential land and primary production land only. Aside from Queensland, Western Australia and the Northern Territory, no other jurisdiction levies duty on non-land assets.

In most jurisdictions, this duty is payable by the Buyer. However, a liability for stamp duty may arise for the Vendor in Queensland and South Australia as both those States levy duty on both parties to a dutiable transaction (ie. a transaction on which stamp duty is payable) on a joint and several basis. Having said that, it is usual for the sale documentation to provide that the Buyer will be liable for any stamp duty in respect of the acquisition.

Any duty payable is calculated at sliding scale rates of up to 5.95% (the top rate in the Northern Territory) and the duty is payable on the greater of the consideration for, or the unencumbered value of, the dutiable property.

The timing for lodgement and payment of duty varies between jurisdictions, with Queensland and Victoria having the shortest timeframe and requiring lodgement within 30 days of the dutiable transaction.

Pre-sale dividends

Pre-sale dividends involve the Target entity declaring and paying a dividend to its shareholders (ie. the Vendors) prior to the disposal of the Target to the buyer. This is typically undertaken to extract franking credits to the Vendors who may value the franking credits higher than the buyer (eg. if unavailable post-acquisition). In the case of a public company Target, it is customary for the Target to seek a tax ruling for its shareholders in order to provide tax certainty.