How the small business capital gains tax (CGT) concessions can make the sale proceeds tax free

If you are selling your business, you may be able to make the sale tax free. There are, however, some complex rules concerning this that you need to become familiar with, to ensure you don’t pay more than you have to.

To ensure you can access the concessions, you need to;

  1. Check your eligibility for the concessions as a whole
  2. Review what the different concessions are
  3. Check which concessions are available to you
  4. Review the best way to apply the concessions
  5. Ensure the proper records are kept 
  1. Eligibility – Do you meet the basic conditions for the small business CGT concessions?

You must first satisfy one of the following:

  • you’re a small business entity with an aggregated turnover of less than $2 million
  • you don’t carry on business (other than as a partner) but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (passively-held assets)
  • you’re a partner in a partnership that is a small business entity, and the CGT asset is:
    • an interest in a partnership asset (partnership assets), or
    • an asset you own that is not an interest in a partnership asset (partner’s assets) but is used in the business of the partnership
  • you satisfy the maximum net asset value test.

You’re a small business entity for the four CGT concessions if you’re an individual, partnership, company or trust that:

  • is carrying on a business, and
  • has an aggregated turnover of less than $2 million.

Aggregated turnover is your annual turnover plus the annual turnovers of any business entities that are your affiliates or connected with you. If you are involved with other businesses, it is important you understand the implications of this as the business may well be affiliates or connected with you. If this applies, you should seek professional advice. It is beyond the scope of this article to review the definition of affiliates and business entities that are connected.

The maximum net asset test is passed if you have net assets of no more than $6 million (excluding personal use assets such as your home, to the extent that it has not been used to produce income). If this applies to you, ensure you check this thoroughly and seek professional advice. It is beyond the scope of this article to review the full list of exclusions defined as personal use assets.

  1. The Concessions

The concessions available are;

50% active asset reduction

You can reduce the capital gain on an active asset by 50%

Retirement exemption 

Capital gains from the sale of active assets are exempt up to a lifetime limit of $500,000. If you’re under 55, the exempt amount must be paid into a complying super fund or a retirement savings account.

Note that although this is called the ‘Retirement exemption’, you do not have to retire after the sale of the business to access this exemption.

CGT discount for assets held for 12 months or more before the relevant CGT event.

    • Not available to companies.
    • For foreign resident individuals, the 50% discount is removed or reduced on capital gains made after 8 May 2012.
    • Description: Allows you to reduce your capital gain by 50% for resident individuals (including partners in partnerships) and trusts
    • How to do it: Subtract the cost base from the capital proceeds, deduct any capital losses, then reduce by 50% 
  1. Check which concessions apply to you

Now that you have an overview of what the concessions are, you can check which apply to you. You may want to obtain professional advice. 

  1. Best Way to Apply the Concessions

As there is a lifetime limit of $500k for the retirement exemption, your best course of action may be to;

  1. apply the 50% discount for holding the asset for more than 12 months (note, this isn’t available to companies)
  2. then apply the 50% active asset discount, and
  3. then apply the retirement exemption.

An example of how the concessions may be applied is below.

Sale proceeds $750,000
Cost base (cost of purchasing business) $300,000
Capital gain on sale before applying concessions $450,000
CGT discount for holding the asset more than 12 months (50% of gain on sale) $225,000
Active asset discount (50% of gain on sale after applying the CGT discount) $112,500
Remaining capital gain after applying the CGT and active asset discounts and the retirement exemption amount $112,500
Capital gain after all concessions applied $0

 

  1. Keeping records for CGT small business concessions

You must keep records of everything that may be relevant to working out whether you have made a capital gain or loss from a CGT asset.

This means you need records to substantiate the purchase and disposal of any CGT asset, as well as other costs relating to the asset. Records can include contracts, valuations, and details of commissions and legal fees you paid. Penalties can apply if you don’t keep the records for at least five years after the relevant CGT event.

If you use information from those records in a later tax return, you may have to keep your records for longer. If you’ve applied a net capital loss, you should generally keep your records of the CGT event that resulted in the loss until the end of any period of review for the income year in which the net capital loss is fully applied.

The records must:

  • show the nature of the act, transaction, event or circumstance, and the date it happened
  • be in English, or in a form that can be readily translated into English.

If you don’t keep proper CGT records you might have to pay:

  • extra expenses to establish the cost of an asset when you dispose of it
  • more tax than necessary.

Summary

In summary, the CGT concessions are a great way to enable you to sell your business without paying a substantial amount of tax. Depending on your corporate structure and age, you may be able to obtain the proceeds tax free.

 

 

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