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.
Share sales are personal property and usually non-taxable, except if the seller:
originally bought the shares for resale instead of long-term investment
deals in shares.
In these 2 situations, any profit from the share sale will be taxable – the seller will need to include it as income in their tax return.
This page covers tax-related issues or topics that can come up when selling shares in a business. But speaking to a professional tax advisor is always recommended.
Earn-Out Payments: 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 the 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.
Financing Costs: Interest and other financing costs related to the sale and purchase of a business can usually be claimed as an expense.
GST: The sale of shares is usually GST exempt, meaning it's not subject to GST and is not included in a GST return.
Imputation Credit: 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.
Legal and other sale-related costs: 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.
Other warranties or indemnities: 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.
Restrictive Covenant payments: 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.
Tax Losses: Currently, a company needs to maintain minimum voting interests of 49% in order to carry forward tax losses. If due to the sale of shares this percentage is not met, the company cannot carry forward any tax losses made before it sold the business shares.
Source: IRD
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