Small business capital gains tax concessions – Explained
Navigating the landscape of small business capital gains tax (CGT) concessions can significantly impact your tax liabilities when selling business assets. This guide will explore the various CGT concessions available to small businesses in Australia, providing a detailed understanding and practical examples to illustrate how these concessions can be applied.
Overview of Small Business CGT Concessions
Small business CGT concessions are designed to help small business owners reduce their capital gains tax liability. These concessions are particularly beneficial when a business disposes of an asset that has appreciated in value. To qualify, businesses need to pass certain ‘tests’, such as the $12 million aggregated turnover test or the $6 million maximum net asset value test.
Types of Small Business CGT Concessions
There are four main types of CGT concessions available to small businesses:
1) 15-Year Exemption: If your business has continuously owned an asset for at least 15 years and you are aged 55 or over and retiring, or are permanently incapacitated, you may be eligible to completely disregard any capital gain on the sale of the asset.
2) 50% Active Asset Reduction: This concession allows you to reduce your capital gain by 50%. It applies to active assets, which are assets used, or held ready for use, in the course of carrying on a business.
3) Retirement Exemption: Capital gains from the sale of active assets are exempt up to a lifetime limit of $500,000. If you are under 55, the exempt amount must be contributed to a complying superannuation fund.
4) Rollover Relief: If you sell a small business asset and buy a replacement asset or make improvements to an existing asset, you can defer your capital gain until the disposal of the replacement asset.
Practical Example (1)
15-Year Exemption: John has owned and operated a bakery for 20 years. He decides to retire at the age of 60 and sell the bakery, which includes the business premises valued at $800,000, which he originally purchased for $300,000. Since John meets the requirements of the 15-year exemption (over 55 and retiring, and the asset has been held for more than 15 years), he can completely disregard the capital gain of $500,000 from the sale of his bakery.
Practical Example (2)
50% Active Asset Reduction and Retirement Exemption: Sarah runs a graphic design business and decides to sell one of her commercial printers for $50,000, which she bought five years ago for $30,000. The printer qualifies as an active asset. Sarah can first apply the 50% active asset reduction, reducing the capital gain to $10,000 ($20,000 gain reduced by 50%). Since Sarah has not previously used the retirement exemption, she decides to apply it to this gain, making the $10,000 gain completely tax-free.
Eligibility Criteria
To qualify for these concessions, you must meet several eligibility criteria:
- Your business must have an aggregated turnover of less than $2 million, or your business assets must not exceed $6 million.
- The asset must be an active asset.
- Additional conditions apply for each specific concession, such as age and duration of asset ownership.
Understanding and leveraging small business CGT concessions can significantly reduce your tax burden when selling business assets. Whether you’re planning for retirement, reinvesting in your business, or simply looking for tax-saving strategies, these concessions provide valuable opportunities to minimize capital gains tax. However, eligibility requirements and application complexities mean that professional advice is essential to maximize your benefits. If you’re considering selling a business asset, reach out to our team at Tax Stuff — we’ll help you navigate the process and make the most of these tax-saving opportunities!
Disclaimer
Please note, this article does not take into consideration your specific objectives, financial situation or needs and is to be taken and read as general information only. Tax Stuff Pty Ltd does not accept liability for any use of this information, before acting on any information contained in this article, please consult with a registered tax agent taking into consideration your specific circumstances. If you do not have a registered tax agent and require more specific advice relating to your circumstances, please [Contact Us Here].
