CGT and Small Business Concessions
20 years after introduction of the small business CGT concessions, many business owners are unaware of their options. A carefully thought out plan with advice is smart.
The fact is most business owners fail to plan for the final succession plan for their hard earned company and assets.
We often identify business where opportunities for generous capital gains tax (CGT) concessions are missed on the sale of a business. Profit from the hard work and effort by taking advantage of the CGT concessions.
Inside the income Tax Assessment Act 1997 (Cth) Division 152, there are four key CGT small business concessions available. Get early advice on these concessions if you are considering selling your business, and structure the sale in a way that will allow you to take full advantage.
You must be able to satisfy the basic eligibility conditions for relief before you can enjoy these benefits.
The CGT event must occur in relation to your “CGT asset”. This may be the sale of a business you own, however these terms are defined under tax law.
Assuming this is the case, you must then either:
- be a small business entity for the relevant income year;
- be a partner in a partnership (that is a small business entity) for the relevant income year, with the CGT asset being an interest in an asset of the partnership; or
- Satisfy the “maximum net asset value” test.
Small Business Entity and Partnership Interests
If your aggregated turnover from either the previous or current year is less than $2 million, then you are considered a small business entity. Similarly, if a partnership meets this small business entity definition, as a partner in the partnership you will have satisfied the eligibility condition.
Maximum net asset value test
The maximum net value of all CGT assets that belong to you, any entities connected with you and any affiliates or entities connected with your affiliates must not exceed $6 million just before the relevant CGT event for which you are trying to access a CGT concession.
Be wary of timing! If the value of your business and assets is growing and you are approaching this threshold, act fast to take advantage of the CGT small business concessions.
As long as you have satisfied the above eligibility conditions, you are able to take advantage of the CGT relief under one of the following four conditions.
Small business 15-year exemption (Subdivision 152-B)
If you have owned the CGT asset for an unbroken period of 15 years, and are over 55 when you sell the CGT asset, you may completely disregard any capital gain arising from the sale.
This is a highly valuable tool to use in retirement planning. If you’re not sure, you should seek professional advice to ensure you don’t miss out.
Small business 50% reduction (Subdivision 152-C)
If you have not owned your business for 15 years, or are not ready to retire, then this concession allows you to reduce a capital gain by 50%, in addition to the 50% CGT general discount available to individuals under Division 115. This will give you a 75% reduction in your taxable CGT asset.
Small business retirement exemption (Subdivision 152-D)
If you are under 55, and contribute the proceeds from the sale of a CGT asset to a super fund, you can elect to disregard all or part of a capital gain made from the sale. There is a life time limit of $500,000 for this exemption, so you can utilise it over the course of multiple asset sales until you reach the limit.
Small business roll-over (Subdivision 152-E)
You can elect a roll-over, and reinvest the proceeds from the sale of your existing business into a new business (one that you either purchase or start) and defer the making of a capital gain from the sale until you ultimately dispose of that new business.
You have up to two years post-sale to purchase or start the new business before you trigger the obligation to pay CGT on the original sale. This roll-over could be used simply to defer your CGT obligations for two years with potentially significant savings.
If you are a small business owner start planning for your ultimate exit, because it is very difficult to change a structure and meet the criteria within the time frames.
Smart business owners seek early legal and tax advice and put themselves in the best possible position ready for the exit at the best value and with the best allowable revenue outcomes.