MAXIMISING SMALL BUSINESS CAPITAL GAINS TAX CONCESSIONS

Often the most valuable asset a small business owner has is their business. When Peter Costello was treasurer he recognised this, and introduced a new section into the income tax assessment act that he said was to provide, “small business people with access to funds for retirement or expansion”.

The small business CGT concessions apply to companies, unit trusts, and individuals. Unfortunately, because of the way that the tax rules apply to companies and unit trusts, they don’t get the full benefit of all concessions. This means businesses owned by family trusts or individuals receive the maximum benefit from the small business CGT concessions.

These small business capital gains tax concessions can result in owners that sell a business, that has been operating for less than 15 years, not paying any tax on the profit of up to $2 million per person when five people own the business. For businesses that operate for at least 15 years no capital gains tax will be paid on any profit made for a business owned by up to 5 people.

There are two ways that owners of small business can qualify for these generous CGT concessions. The first is if the annual sales turnover of a business is less than $2 million, and the second is if you and your affiliates have net assets of less than $6 million.

Affiliate’s are businesses effectively controlled by an individual or a business. Net assets do not include the value of personal use assets such as a home or holiday house or superannuation. They do include the value of all other assets after decreasing them for loans related to those assets.

There is another test that must be passed when you own the business with others. To qualify for the concessions you must be classed as a significant individual. This means you must own at least 20 per cent of the business. For businesses owned by family trusts to be eligible for the concession a person must receive at least 20% of the profits distributed in the year the capital gain is made

The capital gains tax concessions only apply to active assets of a business. These include real property, such as business premises, and the goodwill of a business. In certain circumstances shares in a company will also qualify as an active asset if 80% or more of the market value of the company’s assets are active assets. In other words 80% of the value of the company must be made up of business-related assets and not investment assets.

The small business CGT concessions to not only reduce the tax payable on the sale of the business, but also provide the ability to make large contributions to superannuation that are greater than $110,000 or $330,000 non-concessional limits that apply.

When a business or business assets have been owned for more than 15 years no capital gains tax is payable on the profit made, and up to $1,650,000 can be contributed to a superannuation fund as a non-concessional contribution that results in tax-free superannuation benefits.

If the business has been operating for less than 15 years the profit or capital gain made on the sale of the business is:

first reduced by any capital losses,

it is then reduced by the general CGT discount if the business has been operating for 12 months or more, and

then can be reduced by the 50% active asset reduction.

Up to $500,000 of the remaining capital gain will be tax-free under the small business CGT retirement exemption, and tax payable on any remaining taxable gain can be deferred under the rollover conditions.

If the small business retirement exemption is claimed, and the business owner is under 55, the amount claimed must be contributed to a super fund. If the business owner is more than 55 they don’t have to make the contribution and can use the proceeds personally.

In addition to the rules relating to claiming the small business CGT exemptions there are other things that must be done, including completing and lodging forms with the ATO.

Given the complexity of the capital gains tax concessions, and especially for businesses that have a turnover of more than $2 million, it is important to contact TaxBiz Australia well before selling a business to make sure the CGT concessions are maximised.