Many small business owners invest not only financial resources in their business but also significant time, blood, sweat and tears not to mention emotional energy in building their business. When it comes time to sell, it’s good to know that tax concessions are available so that the capital gains you’ve worked hard to achieve aren’t all eaten up by tax.
First things first, what’s a small business according to the Tax Office definition?
In order to be qualify for the small business capital gains tax concessions, the following must apply:
- The entity must be carrying on a business or the asset being sold must be used in a small business entity.
- The entity must have an aggregated turnover of less than $2 million or
- Have net assets of less than $6 million (this includes you and any associates or affiliated entities).
- The asset being sold must be an active asset of the business (that is be held to be used in the carrying on of a business). Passive investments (for example residential property) will not usually be considered to be active assets.
Note that the turnover and net asset limits are different to the ones which are applicable to the small business simpler depreciation rules.
If these conditions are met immediately before the sale, there are four concessions which are available.
- The 15 year exemption. If a small business has been owned for more than 15 years and the owner is over 55 years of age and retiring, there is no capital gains tax applicable.
- 50% active asset. The capital gain on any small business active asset that is sold can be reduced by 50%.
- Retirement exemption. If the owner is under 55 years of age, the capital gain be contributed to a complying superannuation fund. There is a lifetime limit of $500,000 for this concession.
- Any part or all of a capital gain can be deferred for up to two years if the proceeds are to be used to buy a replacement asset or make capital improvements to an existing asset. If after two years, a replacement has not been purchased, the capital gain must be included in that year’s income tax return.
In addition to these concessions, if the general 50% capital gains tax discount is available (that is the asset is owned by an individual or trust), that is applied first.
You choose which small business concessions you wish to apply – you do not have to apply either the retirement exemption or the rollover options. An election is taken to be made when you lodge your tax return.
There are some additional conditions if the CGT asset being sold is a share. In addition to meeting the basic conditions above, it is also necessary for you to be a “CGT concession stakeholder” of the company This means that you must hold a participation percentage of at least 20% (this is considered a significant individual). There are rules around how the participation percentage is calculated including dividend and voting rights. The spouse of a significant individual is also a CGT concession stakeholder.
I’ve really skimmed through the concessions because they are complicated and very specific to each small business. No two small businesses are the same and it really does depend on what is being sold and how the investment is held. The important take out is that if you are a small business owner who is thinking of selling, talk to your accountant first. These concessions are quite generous, so you want to maximise them and sometimes it’s too late once you’ve finalised the sale.
If you’re a small business owner and you’d like to chat about how you might tax effectively manage a transition to retirement, I offer FREE 30 minute initial consultation. You can easily book online here and I look forward to helping you sort your taxes!