Too often business owners fail to take advantage of the generous capital gains tax (CGT) concessions available when selling a business. It takes hard work and dedication to build and manage a successful business, but all that effort could amount to very little if you end up being hit with high CGT on the sale proceeds.
There are four CGT small business concessions available under Division 152 of the Income Tax Assessment Act 1997 (Cth), each potentially providing you with sizable tax savings on the sale of your business. If you are currently in the process of selling your business or thinking about doing so in the not too distant future, it is important to keep the available concessions in mind and structuring the sale in a way that will allow you to take full advantage of the small business concessions.
Before you can reap the benefits of the available concessions, you must be able to satisfy the basic conditions for relief.
The first requirement is that a CGT event must occur in relation to your CGT asset. These terms are defined under the tax law and many different situations may qualify, but for our purposes let's take the most basic – the sale of a business you own.
Assuming that 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
These conditions are relatively straightforward. Essentially, if you are carrying on a business during the current income year and either the aggregated turnover for the previous year is less than $2 million or the aggravated turnover for the current income year is likely to be less than $2 million, then you are considered a small business entity.
If a partnership meets this small business entity definition, as a partner in the partnership you will have satisfied this 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.
This test can be somewhat complicated to apply in practice given the need to work out precisely what entities are considered 'connected with' you and/or your affiliates. The direct and indirect control tests are relevant considerations, but for our purposes let's assume you've done all the calculations and you fall under the $6 million threshold.
Timing is critical – if the value of your business and assets is growing and you are approaching this threshold, you may need to act fast if you wish to take full advantage of one or more of the CGT small business concessions.
Having satisfied one of the above eligibility conditions, you are then able to access CGT relief under one or more of the following four concessions.
Small business 15-year exemption (Subdivision
If you are over 55 when you sell a CGT asset (e.g. your business), have owned the CGT asset for a continuous period of at least 15 years and the sale is made in connection with your retirement, you can completely disregard any capital gain arising from the sale.
The ability to avoid CGT entirely on a business sale is an incredibly valuable tool in retirement planning. If you're on the edge of these access conditions and not quite sure if you qualify, be sure to get professional advice early so you don't inadvertently miss out.
Small business 50% reduction (Subdivision
If you are not ready to retire or have not owned your business for 15 years, then an election under this concession allows you to reduce a capital gain you make by 50% – in addition to the 50% CGT general discount available to individuals under Division 115. This in effect reduces the gain by a massive 75% (if you meet the relevant conditions).
Small business retirement exemption (Subdivision
This useful exemption is available to those under the age of 55. You can elect to disregard all or any part of a capital gain made from the sale of a CGT asset provided you contribute the proceeds into a super fund. A lifetime limit of $500,000 applies, so you can keep utilising this exemption over the course of multiple asset sales until you reach the limit.
Small business roll-over (Subdivision 152-E) By electing a roll-over, you can neatly reinvest the proceeds from the sale of your existing business into a new business (that you either start or acquire) and defer the making of a capital gain from the sale until you ultimately dispose of the new business.
You have up to two years post-sale to acquire the new business or you will trigger the obligation to pay CGT on the original sale. Even if you don't end up buying a new business, the roll-over provisions could be used to defer your CGT obligations for two years to a later income year – with potentially significant savings if used correctly.
TAKING FULL ADVANTAGE
If you have spent years building value in your business, why should you be hit hard with capital gains tax when it is finally time to sell up?
If used effectively, these four CGT small business concessions can provide you with substantial tax savings and can sometimes be accessed in combination with others (depending on your circumstances), so be sure to check with your professional adviser to make the most out of your situation.
For further information please contact:
William Kontaxis, Associate
Phone: +61 2 9233 5544
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.