Selling your business. Do you qualify for a Capital Gains Tax concession?

Selling or closing a business needs careful planning if you are to minimise stress and maximise your return. Getting proper advice before you divest your business is important to ensure you are not overlooking any tax concessions that may be available.

When you sell or otherwise divest your business, it will generally create a capital gains tax (CGT) event and will need to be declared in your tax.
CGT is the tax that you pay on any capital gain. It is not a separate tax, just part of your income tax.

As a small business owner, you may qualify for certain CGT concessions. For example, the 15 year CGT exemption allows a small business to be sold tax free, but there are conditions to consider.

These conditions can include consideration of the value of the business, how long you have owned the business, your net wealth, and other eligibility criteria depending on your particular circumstances.

Other small business CGT concessions are also available that allow you to reduce, disregard or defer some or all of a capital gain from the sale of assets used in small businesses.

There are four main CGT concessions for the sale of a small business:

  • 15 year CGT exemption
  • 50% active asset reduction
  • Small business retirement exemption, and
  • Small business rollover.

To be eligible for any CGT concessions, you must first meet the basic eligibility conditions.

The basic eligibility concessions include consideration of the following:

  • Whether you are an eligible entity – this includes a business with aggregated turnover of under $2 million, or you meet the maximum net asset test (broadly net CGT assets less than $6 million)
  • The asset must be an active asset – that is, an asset that is used in running a business.

Other conditions must also be met where the asset is a share in a company, or an interest in a trust, or whether your situation involves a CGT event related to a partnership.

An example, Tracey is a small business operator who sells an active asset that she has owned for more than 12 months. She makes a capital gain of $120,000. Tracey also has a separate capital loss of $4,000.
She meets all the conditions for the small business 50% active asset reduction and the CGT discount. Tracey calculates her net capital gain as follows:

$120,000 (capital gain)
$4,000 (capital loss)
= $116,000 (net capital gain)
x 50% (applying the CGT discount)
= $58,000 (net capital gain)
x 50% (applying the small business active asset reduction)
= $29,000 (reduced capital gain)
Tracey may be able to further reduce her $29,000 (already reduced) capital gain by using the small business retirement exemption and small business roll-over if she meets the conditions for those concessions.
If eligible, she can keep applying the other small business CGT concessions to reduce her capital gain to zero.

Note: The CGT eligibility rules are complex, and specialist advice from a registered tax agent should be obtained to help you understand the rules and how it applies to your situation.

Depending on the type of CGT concession available in a business sale, there may be further tax effective strategies for the use of your sale proceeds.

For example, you may be able to use your sale proceeds to contribute to your super fund when applying for the small business 15 year CGT exemption, without affecting your non-concessional contribution limits.

Understanding your CGT obligations and or getting advice on what you are entitled to can maximise your after tax returns in a business sale.

For further reading go to:
https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax

 

Expertise and support when you need it.

Should you need any assistance or professional advice concerning these and other tax measures, please make a time for a chat with a Bentleys business advisor. We can help you to get where you want to be.

 


Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.