Selling Shares in a Private Company: Tax and Timing Traps

1. CGT timing: tax can be triggered before cash is received

A common misconception is that tax follows cash. In most cases, it does not.

For CGT purposes, the taxing point is generally when the contract is entered into. It is not necessarily when settlement occurs, or when the seller receives the cash.

This is because CGT event A1 generally happens when the disposal contract is entered into. If there is no contract, it happens when ownership changes.

That can create a few issues.

• Tax can be payable before cash is received. If settlement is deferred, or part of the purchase price is paid later, the capital gain may still be recognised upfront. This can create a real cash flow issue where the tax liability arises before the sale proceeds are available.
• Timing can materially affect the tax outcome. A contract signed on 29 June rather than 1 July can shift the gain into a different income year. That can affect available capital losses, marginal tax rates and the timing of future CGT changes.
• The CGT discount needs to be checked before signing. Currently, individuals and trusts may be eligible for the 50% CGT discount where shares have been held for at least 12 months before the CGT event. With changes to the discount rules coming into play from 1 July 2027, timing and valuation evidence will become even more important, particularly where a sale straddles the change date.

Timing is one of the few real tax planning levers available in a sale process. With the CGT discount rules changing from 1 July 2027 , vendors should consider the contract date, valuation support and split between pre- and post-change gains before execution. Once the contract is signed, the tax outcome is largely locked in.

2. Escrow arrangements: cash later does not mean tax later

Escrow arrangements are common in private sale transactions. Part of the purchase price may be held back to cover warranty claims, indemnities or post-completion adjustments.

For vendors, escrow can create a cash flow issue. Funds that are not immediately available may still form part of the tax calculation at the time of sale.

In many cases, the seller may still be taken to have received the full capital proceeds at the time of sale, even though part of those proceeds remains in escrow and may ultimately be reduced or forfeited.

This can mean:

• tax is payable on amounts not yet received;
• escrowed amounts are included in the seller's capital proceeds from day 1; and
• a later adjustment or clawback requires further CGT adjustments, which can become administratively complex.

There is limited scope to defer the tax outcome simply because part of the purchase price is sitting in escrow.

Escrow is not only a legal or commercial protection mechanism. It can create a real tax cash flow issue for vendors. The tax consequences should be understood and modelled before the sale terms are finalised.

3. Earn-outs and deferred consideration add complexity

Many private transactions involve deferred consideration, such as an earn-out , vendor finance arrangement, staged payments or an equity rollover.

These structures can bridge a valuation gap and get a deal across the line. The trade-off is added tax complexity, which needs to be worked through before the parties agree on the commercial terms.

Common issues include:

• determining whether amounts are capital or revenue in nature;
• applying the earn-out rules where relevant;
• dealing with consideration that is contingent or is ultimately never received; and
• making sure the tax treatment reflects the commercial intent of the arrangement.

The tax treatment of deferred consideration needs careful analysis, particularly where the arrangement changes the timing, character or certainty of what the vendor receives.

The headline purchase price can be very different to both the amount ultimately received and the amount subject to tax.

Before agreeing to the deal terms, vendors should understand the tax treatment of every component of consideration. Leaving it until after completion can lead to unexpected outcomes and costly remediation.

4. Valuation of private company shares for tax

Private company shares are illiquid. Transactions often reflect discounts for a lack of control or marketability.

But for tax purposes, the negotiated price is not always the end of the story.

The tax rules can substitute market value where parties are not dealing with each other at arm's length. In that case, the agreed price may not be the value used to calculate the capital gain.

This can be relevant where:

• shares are transferred between related parties;
• the transaction forms part of a broader restructure; or
• only a partial interest in a business is being sold.

In these circumstances, valuation evidence matters. It can be the difference between a defensible tax position and questions from the ATO after the event.

Valuation is not only a deal issue. It is a tax issue. If a discount or adjustment is being applied, it needs objective support.

5. Paper wealth does not always become cash in the bank

Many private market deals leave the vendor with some ongoing exposure through deferred consideration, vendor finance or earn-out arrangements. Vendors can find themselves:

• waiting years to receive the full purchase price;
• effectively funding part of the acquisition;
• retaining exposure to future business performance; or
• involved in disputes about earn-out calculations and post-sale decision making.

These structures exist because there is uncertainty around future value. The challenge is that a significant portion of that uncertainty is often transferred back to the seller.

Understand the commercial risk profile of the consideration just as well as the headline value being offered.

Plan the tax outcome before signing

A successful exit is about more than maximising value. The commercial outcome and tax outcome should align as closely as possible.

Before signing, vendors need to understand:

• when tax liabilities arise;
• when cash is actually received;
• how much consideration is contingent or at risk; and
• whether the underlying valuation can be supported.

That usually means bringing tax, legal and valuation advice together while deal terms are still being negotiated.

Too often, tax is considered after the commercial terms have been agreed. By then, the opportunity to restructure the arrangement is usually limited.

Getting these issues right before transaction documents are signed can improve the after-tax outcome and reduce the risk of tax becoming payable on value that is never ultimately realised.

If you're considering a sale of shares in a private company, speak with BlueRock early in the process. We can help you understand the tax consequences of the proposed terms before they are locked in. Submit the form below to get in touch.