Two different vendor clients, sought advice whether a sale of shares of a company owning their respective businesses was more advantageous from a commercial and tax outcome than a “business asset” sale.
The Purchaser may benefit, due to stamp duty savings (especially outside Victoria) if a share sale occurs. For instance, in NSW it could drop from 5.5% to 0.6%. Vendors typically achieve tax savings of 50% of the capital gain when selling their shares, being a reduction of the maximum marginal tax rate of 46.5% after applying the 50% CGT discount (leaving aside any small business concessions).
Purchasers often express a desire to purchase “a Business” only in a generic rather than literal sense. Vendors should test the Purchaser’s flexibility and readiness to purchase shares where the circumstances warrant so long as it does not collapse the deal. The main commercial (non tax) benefit to the Purchaser of a share sale is the goodwill is better preserved with clients/customers under long term contracts (without “change of control” clauses).
That assists the Vendor in negotiations to secure a share sale rather than “business assets” sale. Especially, where the Vendor is subject to an “earn-out”. A Vendor selling shares will have direct access to cash instead of retaining shares and winding up a cash rich holding company after completion with a long trading history. For tax purposes, aside from the general 50% CGT discount, vendors may be entitled to CGT rollover relief to defer the gain, where there is a scrip for scrip sale of shares (i.e. exchange of shares for shares in the Purchaser or its group) in whole or part.
Negatively, a “business assets sale” by a company Vendor will result in substantial profits being trapped in it. When paid out as a dividend, the shareholders will be taxed as ordinary income which is not subject to CGT discounting (ie top up tax or full tax on the unfranked portion). A liquidation dividend may however prove more advantageous than such a dividend. A sale of shares in a non-land rich company will in many jurisdictions (eg Qld/Vic) not be subject to stamp duty. In NSW, stamp duty on marketable securities (other than land rich ones) will cease to apply from 1 July 2012. A sale of shares is a financial supply that will not be subject to GST.
Transaction costs incurred by the Vendor of shares will typically reduce the CGT gain. Taxation advice from an appropriately qualified tax lawyer or tax agent will be separately tax deductible (often at 46.5% for individual vendors on the maximum marginal tax rate) or further reduce the net capital gain as the circumstances permit. A Vendor and Purchaser will have competing commercial and tax interests in a business sale. Often, with the right advice, those competing interests can be managed and turned into a positive outcome for all parties concerned. The use of appropriate contractual terms and warranties with related security retentions (especially against contingent liabilities), can be crafted to give adequate comfort/commercial protection for all stakeholders.