What is Capital Gains Tax?
Capital Gains Tax (CGT) is generally the tax paid on the profit of a capital asset when it is disposed. The profit or Capital Gain is the difference between what it costs you to purchase an asset and what you received when you disposed of it. The most common CGT assets include: land, buildings, shares in a company and units in a unit trust.
Exemptions
There are some key capital gains tax exemptions to keep in mind with most common exemptions being the sale of your own main residence and the sale of any assets owned before 20 September 1985. Small business owners also qualify for CGT exemptions and concessions but these are not as well known and can be missed if you don’t get the right tax advice.
Small Entity (SBE) Concessions and Exemptions
Once a small business qualifies as an SBE for the capital tax exemptions (either by having business turn over less than $2 million a year or having a total net worth of less than $6M) there are four concessions available to them.
Firstly, there is the 15-year asset exemption. This is seen as the most valuable small business CGT concession. To be eligible, a person must have continuously owned and operated a business for at least 15 years, must be either over 55 and selling the business because they are retiring, or be selling the business because they are permanently incapacitated. With this exemption, there is no limit on the amount that can be claimed. However, there is a limit in the amount that can be contributed as non-concessional tax-free super benefit. For this financial year, the lifetime CGT limit is $1,315,000. However, if you decide to use this exemption, none of the other exemptions can be claimed.
Another exemption is the 50% active asset reduction. This CGT discount is claimed in addition to the 50% general CGT discount. If none of the other exemptions were claimed, tax will be paid on only 25% of a capital gain made on the sale of a business.
The CGT retirement exemption is another one and has a lifetime limit of $500,000. The owners can either claim the full $500,000 from the sale of one business, or they can progressively use this exemption on several business sales up to the maximum limit. This limit imposed in an example of where its value has eroded over time. This figure would be much higher if it kept pace with the rate of inflation.
If you as the business owner are under the age of 55, the retirement exemption must be contributed to a superannuation fund to receive the benefit of exemption. If the owner is 55 or older, the exemption does not have to be made as a super contribution.
The final CGT exemption available for small businesses is the rollover concession. With this concession, tax payable on the capital gain on the sale of a business is effectively delayed. This is done by using it to decrease the purchase cost of a replacement active business asset. When the replacement business asset is sold, capital gains tax will be payable then.
Conclusion
In summary, the CGT concessions are a complex part of the tax system. They can be used individually or together for the sale of a business or asset. We strongly recommend getting tax advice on this area before you proceed with a sale to make sure the business does the right things to qualify for the concessions.
If you have any further questions on CGT for small business, please don’t hesitate to get in touch with the team at Fortis Accounting Partners for more information. You can reach us on 02 9267 0108, or via info@exemplary-financial.flywheelsites.com.
