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.
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.