Current as of May 2017
Since 1999 there have been measures in place to assist the small business community and effectively provide concessions on the amount of CGT payable on the sale of a business. The concessions (which are called the Small Business Concessions – SBC) are significant and, with proper planning, will allow you to minimise any CGT that you might pay on the sale of your business.
Please note these CGT SBC are additional to the CGT General Discount where you can discount the capital gain if you had held the asset for > 12 months. The combination of the General Discount and the CGT SBC can mean you can make a large proportion of your capital gains on the sale of your business non taxable.
There are four main concessions available which we will discuss later in this article. To be able to access any of these concessions there are basic conditions which must be satisfied as follows.
Basic conditions for accessing the concessions
- You are a Small Business
You will generally be treated as a small business entity if the sum of your group’s turnover in the year or the previous year was less than $2 million.
Even if you are above this threshold you can still be a small business if, at the time of disposal of the asset, the sum of the net asset value of your entity, of any entities and individuals connected with your entity, is less than $6 million. This is a very complex calculation as there are some assets caught while other assets are not caught within this measurement (eg your home and superannuation are not counted);
- The Asset sold is Active
The CGT asset sold is an active asset if it is an asset which was used in the course of carrying on a business (including goodwill). It must have been an active asset during at least half of the period held and specifically just before the disposal of the asset.
Specific rules apply for some passive assets (like commercial properties used in the business) which might still allow you access to the concessions.
If you are selling shares in a company or an interest in a trust, the active asset test above will only be satisfied if 80% of the assets owned by the company or trust are active assets for at least half of the ownership period.
- You are a Significant Individual
If the CGT asset sold is a share in a Company or interest in a Trust, there must be what is called a Significant Individual in that entity. This is an individual that holds at least 20% beneficial ownership of all share rights. This can be satisfied by tracing through interposed entities like Trusts. If the CGT asset sold is not this type of asset then this requirement is not necessary.
CGT Concessions available
If these conditions are satisfied the concessions available are as follows:
- The small business 15 year exemption
This is available where the CGT asset has been held for a continuous 15 year period. In addition, the individual is over 55 years of age and the disposal of the asset is connected with the individual’s retirement or their permanent incapacity. Where the CGT asset is a share in a company or an interest in a trust there must have been a significant individual (at least 20% interest) for the entire ownership period.
- The small business 50% active asset exemption
Under this exemption net capital gains are reduced by 50% (in addition to the 50% General Discount). This is only calculated after the application of all current and prior year capital losses and also after the application of the 50% General Discount.
- The small business retirement exemption
This exemption does not require the taxpayer to have actually retired. However, where the taxpayer is an individual and under 55, the exempt amount must be rolled into a superannuation fund. There are significant complexities and timing requirements so care is needed here. The retirement exemption allows $500,000 per stakeholder to be tax free on top of the other discounts above.
- The small business roll-over concession
This allows the taxpayer to roll over a gain made into a replacement asset. This must occur during the period between one year prior to and two years after the occurrence of the CGT event in the income year of the roll over. Under this option the cost base of the replacement asset is reduced by the capital gain rolled over.
Structuring your CGT Concessions
It is important to note that these measures are not mutually exclusive. This means you can access more than one of these concessions, and in the order you choose, if you satisfy the conditions. Additionally, utilising the above concessions does not stop you from accessing the general 50% discount on capital gains where the asset is held for more than 12 months.
Accessing more than one of these concessions needs some planning to take full advantage of the benefits available. While everyone’s circumstances are different, if available, the concessions could be accessed in the following order:
- 15 year exemption
- 50% general discount concession
- 50% active asset exemption
- Rollover residue gain into replacement asset
- Apply any balance, where appropriate, to the retirement exemption (up to the $500,000 lifetime limit)
Please note that any gain rolled over into a replacement asset cannot then be discounted by the 50% active asset exemption or 50% general discount concession on sale of the replacement asset. Consequently these 2 concessions must be utilised prior to using the rollover concession. There are some differences in the tax result depending on the type of structure making the gain.
As a simple example, a family business run through a trust could utilise the General Discount, Active Asset Discount and the Retirement exemption for the husband and wife and get a $4M capital gain down to Nil.
This area is very complex, and the above is just a summary. The ATO are looking very closely at all CGT SBC claims in your tax returns and you must expect an ATO review should you make a claim. It is important to get the procedure and timing right, otherwise you will miss out on the concessions.
Along with this, the only way to be sure of accessing the concessions is to plan ahead. If you plan to sell your business in the next 5 years you should be looking at your structure, business affairs and asset levels to see whether you will be able to claim the concessions. There are legitimate planning strategies that can be put in place to enable you to access the concessions but these will not be able to be done too close to the sale. Get the planning done early as this is the only way to ensure you will be able to save CGT on sale of your business.
This newsletter has been produced by Stanley & Williamson as a service to its clients and associates. The information contained in the newsletter is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this newsletter, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under Professional Standards legislation.