There are currently more than 2 million small businesses operating in Australia. Their estimated combined value is $379 billion, and they employ almost 4.8 million people*. Small business entities can include sole traders, partnerships, trusts and companies.
If you are considering selling a small business or the assets it uses, you may be eligible for a range of CGT concessions to help reduce the taxable capital gain associated with the sale, which could mean more money available to you either now or in retirement.
Importantly, you can apply as many CGT concessions as you are entitled to until the capital gain, associated with the sale, reduces to nil.
Below we discuss the eligibility criteria as well as the four CGT concessions that may be available to you when considering the sale of an asset.
Eligibility for CGT concessions
You will be eligible for the CGT concessions when you sell an asset if:
- You are a small business entity (i.e. your business has aggregated turnover of less than $2 million per year).
- You hold an asset for use by an affiliated or connected small business entity (for example, if you own assets used by your spouse’s business).
- You have net assets less than $6 million (excluding personal use assets such as your home – unless it has been used to generate income).
- The asset is considered an active asset (held for use in a business).
You can gain access to the CGT concessions if you are selling shares in a company or units in a trust, if you meet certain additional requirements.
The small business 15-year exemption
If you owned an active asset for 15 years and you're aged 55 years or over and are retiring (or, are permanently incapacitated), you won’t have an assessable capital gain when you sell the active asset.
It is important to note, that for the 2016/17 financial year, the proceeds from the sale of the active asset may be contributed to super and be exempt from the concessional and non-concessional contributions cap up to the $1.415 million lifetime CGT cap, which is indexed.
The 15-year exemption recognises that the sale of the active asset is part of your overall retirement plan.
The small business 50% (active asset) reduction.
You can reduce the taxable capital gain on an active asset by 50%; this may be used in conjunction with the 50% CGT discount if you've owned the active asset for 12 months or longer.
If you are eligible for the 50% CGT discount, by applying the 50% active asset reduction, you are effectively reducing the taxable capital gain attributed to the sale of the active asset by 75%.
The small business retirement exemption
Capital gains from the sale of active assets may be exempt up to a $500,000 lifetime limit, which is not indexed. However, depending on your circumstances, conditions apply. For example:
- If you're under 55 years of age, the exempt amount must be paid into a complying super fund or a retirement savings account; this contribution to super is exempt from the concessional and non-concessional contributions cap, however counts towards the $1.415 million lifetime CGT cap.
- On the other hand, if you're over 55 years of age, the 'forced contribution rule' does not apply nor are you obliged to retire from the workforce.
The small business rollover
The small business rollover exemption effectively delays the tax payable on the capital gain. It allows you up to two years to acquire a replacement asset; or, you incur expenditure on making capital improvements to an existing asset. If you do acquire a replacement asset, the small business rollover exemption reduces the purchase cost for CGT purposes.
If you are considering selling a small business asset, there are a number of important areas that should be considered, such as:
- Your age will affect some of the CGT concessions available
- How the ownership of the active asset is structured
- The application of the net proceeds, including potentially superannuation options
- Consideration of future active assets and timing
- Timing of other CGT events, losses and/or gains
- Other income and timing of this income.
Depending on the sale value of the business, the ramifications of not utilising the small business capital gains exemptions can cost hundreds of thousands of dollars. Therefore, it is vital to plan up front with the help of your financial adviser and your accountant to minimise tax payable and maximise your net wealth. And, in doing so ensure that the strategies you adopt are in line with your financial objectives and goals.