If you are the owner of a small business it is essential that you plan your exit strategy around one of the four capital gains tax (CGT) concessions available on the sale of small business assets.
These concessions can be extremely effective in reducing your tax liability, especially when the sale of the business or asset is connected with your retirement.
To qualify for the small business CGT concessions you must satisfy the following key conditions:
• Your annual turnover must be under $2m, or the net value of your CGT assets must be under $6m
• The asset sold must be an ‘active asset’ (active assets are assets used in day to day business and generally exclude assets that derive interest, rent etc.)
The concessions apply regardless of your structure (i.e. partnership, company) but there are additional considerations when a company or trust is involved.
15 year exemption
A capital gain arising from disposal of your business asset(s) can be disregarded if:
• You have owned the business or relevant capital asset continuously for 15 years prior to the disposal date
• You are over 55 and are retiring or permanently incapacitated.
You have the choice to contribute the proceeds to your super fund, where income is taxed at lower rates. You can elect to have this contribution subject only to your lifetime CGT cap, without affecting your concessional or non-concessional caps.
50% active asset reduction
You can choose to reduce the capital gain on disposal of an active asset by 50%. This reduction is available in addition to the general CGT 50% discount, so potentially you can be assessed on only 25% of the capital gain. Where eligible, the remaining capital gain can be reduced further by another CGT concession below.
If you are over 55, you can choose to be exempt from capital gainsfrom the disposal of a business asset, subject to a lifetime limit of $500,000. However, if you are under 55 the money must be paid into a super fund to be eligible for this exemption. Again, this does not count towards your concessional or non-concessional caps.
This allows you to defer your capital gain on an asset for up to a year. The capital gain may be deferred for two years or longer if you plan to acquire a replacement asset.
Tip: If you are considering selling, restructuring or even setting up your business, the timing & treatment of your transactions could affect your tax position materially. Be sure to get the right advice and plan around these concessions before you transact. They are well worth aiming for.