Over the past few years, many Australian businesses have shown remarkable resilience. They navigated lockdowns, supply chain disruptions, staffing shortages and rapid regulatory change, and they kept trading when the outlook was uncertain. For some business owners, however, that resilience has come at a cost. While the business survived COVID, it may now be approaching the natural end of its lifecycle.

This does not mean the business has failed. In many cases, owners have simply reached a point where the effort required to continue no longer aligns with their personal goals, energy levels, or the commercial reality of the market. When this happens, it is important to slow down and make deliberate, informed decisions about how to exit the business in the most tax-effective and practical way.

Selling the Business and Accessing Small Business CGT Concessions

For some owners, selling the business- either to a third party or as part of succession planning, is a viable option. Whether revenue has grown, stabilised or declined, goodwill, client relationships, licences or intellectual property may still hold value.

If you sell your business and meet the relevant eligibility criteria, you may be able to access the small business CGT concessions. These concessions can significantly reduce, or in some cases eliminate, the capital gains tax payable on the sale. Depending on the circumstances, this may include the 15-year exemption, the 50% active asset reduction, the retirement exemption or the small business rollover.

Because eligibility depends on factors such as turnover, asset values, ownership structure and active asset tests, early advice is critical. Decisions made well before a sale, sometimes years in advance, can materially affect the outcome.

Clearing Retained Earnings Before Exit

Many businesses that traded through COVID now have higher retained earnings than expected, often supported by government assistance such as the cash flow boost. While this provided welcome liquidity at the time, it can create challenges when it comes time to exit.

A key issue is whether retained earnings can be distributed as fully franked dividends. In some cases, businesses may have accumulated profits but insufficient franking credits to frank those dividends. This can result in unfranked or partially franked dividends, which may be less tax-effective for shareholders.

Strategic planning is required to determine:

• whether dividends should be paid before any sale or wind-up,
• the timing and quantum of distributions, and
• the personal tax position of shareholders.

Ignoring retained earnings until the end can limit your options and increase the overall tax cost.

Deregistration vs Liquidation: Understanding the Difference

When a business is no longer trading, owners often ask whether they can simply deregister the company. In some cases, ASIC deregistration may be appropriate, particularly where the company has no assets, no liabilities, and no need to trigger specific tax outcomes.

However, deregistration is not always the best or safest option. Once a company is deregistered, it ceases to exist, and any remaining assets can vest with ASIC. More importantly, deregistration does not allow for certain tax outcomes that may be critical to the owner's overall strategy.

When a Liquidation May Be Required

A members' voluntary liquidation may be appropriate where there are assets to distribute, retained earnings to manage, or specific tax outcomes to achieve.

Liquidation may be required if:

• you need to trigger a capital loss on shares to offset other capital gains,
• you want to extract value as capital rather than income, or
• there are residual assets or liabilities that must be dealt with formally.

In a liquidation, distributions can often be treated as capital rather than dividends, which may allow access to CGT concessions or more favourable tax treatment, depending on the shareholder's circumstances.

While liquidation can sound daunting, when done for the right reasons and with proper advice, it can be a clean and orderly way to close a business and finalise its affairs.

Planning the Exit, Not Just the End

One of the most common mistakes we see is leaving these decisions too late. The optimal path; sale, wind-down, liquidation or deregistration, depends on a combination of tax, legal, cash flow and personal considerations. What works well for one business owner may be entirely inappropriate for another.

For business owners who have spent years keeping the doors open through extraordinary circumstances, taking the time to plan a thoughtful and tax-effective exit is not just prudent, it is well deserved.

At WSC Group, we work closely with business owners to map out exit strategies that reflect both the numbers and the people behind them. If your business is approaching the end of its lifecycle, early advice can make all the difference to the outcome and provide clarity at a time when it is most needed.

Please note: Many of the comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information's applicability to their particular circumstances.