Capital gains tax (CGT) considerations for small businesses can emerge in regard to all manner of otherwise unremarkable events, including but not limited to the “CGT triggers” list below.
Business owners should keep CGT in the back of their mind when considering a range of transactions — there are activities and transactions that may not obviously, but in fact do, attract tax (which is another good reason to keep an accountant or tax professional in the loop).
The tax provisions in regard to CGT contain concessions for small businesses that recognise the fact that many small business operators commit private capital to their ventures, and frequently have little else to put away outside of their enterprise. These tax concessions therefore, by limiting the tax liability attached to capital gains, help to enable business owners either expand or otherwise change their operations, or fund retirement.
There are four CGT-related tax concessions that can be used by a business that qualifies as a “small business entity” — which means either having no more than $2 million annual aggregated turnover, or coming under a $6 million net asset value threshold (which may include the assets of connected entities and affiliates).
The four small business CGT concessions are:
• The 15-year exemption: Where a taxpayer who is at least 55 years of age and is retiring disposes of a CGT asset that has been owned for a minimum of 15 years
• The retirement exemption: Where capital proceeds are put towards retirement savings. A taxpayer may apply capital proceeds from the disposal of a CGT asset to the retirement exemption, up to a lifetime maximum of $500,000 – as it is not necessary to actually retire, the concession can be utilised more than once
• The 50% active asset reduction: The capital gain arising from the disposal of a CGT asset may be discounted by 50%
• The CGT rollover: A capital gain arising from the disposal of a CGT asset may be deferred provided a replacement asset is acquired within a period up to two years after the CGT event – the gain is deferred until disposal of the replacement asset.
Being able to access these valuable concessions can drastically reduce the amount of income tax (sometimes even down to nil, for example the 15-year exemption) that a small business has to pay on capital gains in a given year. Check with this office if you think your business may qualify.
Under the small business CGT concessions, capital gains made on the sale of active business assets for eligible concerns are either exempt from tax, qualify for “discounts” (a proportion of the gain is tax-free, such as the 50% reduction concession), or gain “rollover relief” which defers the tax liability on the capital gain to a future year (the last is available where a replacement asset is bought within two years of the disposal of the original asset).
The asset must be used in the business, or held ready for use, to be regarded as “active” (or could be used in a business conducted by a connected entity or affiliate of the taxpayer). Land and buildings are obvious examples, but if an asset is intangible, such as goodwill, it needs to be inherently connected with the carrying on of the business. Passively held shares in a closely held company can be active assets, however there is a further test to be satisfied.
Strict eligibility conditions are in place for each of the concessions, however the value of accessing these concessions is obvious – the 15-year exemption alone can reduce your tax bill relating to the sale of that asset to zero.
In certain circumstances, for example where the small business concessions are sought by a company or a trust, a “significant individual” may need to be identified. Also known as a “CGT concession stakeholder”, this natural person will be required for a company or trust to access the retirement or 15-year exemptions, or where the assets involved are equities or interest in a trust. Ask this office about who will qualify to be a significant individual in order to gain access to the small business CGT concessions, should this seem to match your situation.
The owner of a business that overshoots the $6 million net asset value limit should remember that the value of superannuation entitlements does not count towards the asset test threshold, however transferring assets away from a business and into super will need to be completed according to the super rules — with attention given to the contribution caps that apply.
Of course the Tax Office will be on the lookout for arrangements that are entered into merely to chase a tax advantage. In such cases, the Tax Office may be able to remove the tax concession or exemption. With CGT, records are crucial (true of anything to do with tax), so an informed approach taken with a longer term view will take the headache out of CGT considerations. Keep a record of every act, transaction or event that may be relevant, consider using an asset register, and of course consult with this office for further advice and information.
CGT can be triggered by:
- selling an item (assets like a building or property)
- selling part of the business
- buying out a partner
- changing from a partnership to a company, and
- being paid compensation for destroyed assets.