More than two million small businesses are currently operating in Australia. Not only do these enterprises employ close to 4.8 million people; the estimated combined value of all of them is $379 billion. Small businesses can comprise of partnerships, sole traders and companies.
If you have been thinking about selling a small business or any of its assets, you may qualify for various CGT concessions that will help reduce any CGT that forms part of the sale. This could result in you ending up with more funds in your pocket either immediately or during your retirement years.
You are allowed to apply as many CGT concessions as your small business is entitled to until such time as the capital gain that is associated with the sale is reduced to zero.
Below is additional information regarding the four CGT concessions that you may be able to apply, along with the various criteria for eligibility, when considering selling an asset.
CGT Concession Eligibility
You will qualify for these CGT concessions when selling off an asset providing that:
- You hold an asset for use by a connected or affiliated small business enterprise – for instance, if you own any assets that are used in a business that belongs to your spouse, or
- You are a small business entity in that you have generated less than $2 million turnover per year, or
- Your net assets are valued at under $6 million, excluding personal use assets like your home – unless it has been used to generate any form of income, and
- The asset in question is considered to be an active asset in that it is being held for use in a business
You will be able to take advantage of the CGT concessions if you are selling units in a trust or shares in a company as well, provided that specific additional requirements are met.
The 15-year Exemption for Small Businesses
In the event that you have owned an active asset for 15 years and you are 55 years or older and you are retiring or permanently incapacitated, you will not have an assessable gain when you decide to sell the active asset in question.
You will need to keep in mind though, that for the 2016/2017 financial years, any proceeds arising from the sale of an active asset may be contributed to your super fund. This means that they could be exempt from the non-concessional and concessional contributions cap up to the lifetime CGT cap of $1.45 million, which is indexed. The 15-year exemption also acknowledges that the sale of an active asset is part of your retirement plan.
The Small Business 50% or Active Asset Reduction
It is possible to reduce the taxable amount of capital gain on an active asset by 50%. You are then allowed to use this collectively with the 50% CGT discount if you have owned the active asset in question for one year or longer.
If you qualify for the 50% CGT discount and you are able to apply the 50% active asset reduction, you will be able to reduce the amount of taxable capital gin associated with selling the active asset by 75%.
The Exemption for Small Business Retirement
Any capital gains that have been derived from selling active assets may be exempt up to a lifetime limit of $500,000, which is not indexed.
Depending on your specific circumstances, some conditions may apply to this such as:
- If you are under 55, any exempt amounts will have to be paid into a compliant retirement savings account or super fund. This particular contribution to super will be exempt from the non-concessional and concessional contributions cap, but it will still count towards the lifetime CGT cap of $1.415 million
- If you are over 55, you will not be obliged to retire from working and the ‘forced contribution rule’ will also not apply to you
What is the Small Business Rollover?
The small business rollover exemption enables the tax payable on the capital gain to be delayed. It also makes provision for you to take up to two years to acquire a replacement asset; or, to incur expenditure on rendering capital improvements to an existing asset you have. In the event that you acquire a replacement asset, the small business rollover exemption will reduce the buying cost for CGT reasons.
If you want to sell a small business asset, there are several aspects to consider, such as:
- How ownership of the active asset has been structured
- Your current age, which will affect a few of the available CGT concessions
- Consideration of future active assets and timing
- Application of net proceeds, including possible options for superannuation
- Timing of losses, gains and other CGT events
- Other income and the timing thereof
Depending on the price the business sells for, the consequences of not taking advantage of available small business capital gains exemptions can cost you hundreds of thousands of dollars. As a result, it’s crucial that you plan ahead with a reputable financial advisor and accountant to help maximize your wealth and minimise any tax payable. It is also essential that you use strategies that align with your financial goals.