CGT Exemptions From Selling Your Farm
Selling a farm can be both an exciting and challenging process, especially when it comes to understanding the tax implications. A significant consideration when selling any business is the Capital Gains Tax (CGT) which applies to the profit made from selling a business asset. In addressing this, selling a farm may qualify as the sale of a business and Australian farmers who meet specific criteria may benefit from the Small Business CGT exemptions. These can substantially reduce or even eliminate the CGT payable. These exemptions offer substantial financial relief, making the sale of the farm more profitable and lead to better retirement outcomes. Here’s how you can potentially qualify for these exemptions.
Understanding Capital Gains Tax
CGT is a tax that applies to the profit (capital gain) you make when selling a capital asset, such as land, buildings, or shares. In the case of farmers, this typically applies to the sale of the land associated with the business. When you sell your farm, any profit you make (the difference between the cost of the asset and the sale price) is subject to CGT, which is included in your assessable income.
However, the Australian Tax Office (ATO) offers various CGT exemptions for small businesses, provided they meet specific eligibility criteria. These exemptions can reduce or eliminate your CGT liability, helping you keep more of the proceeds from your farm sale.
Qualifying for Small Business CGT Exemptions
To be eligible for small business CGT concessions, your farm must meet certain conditions:
- Small Business Test: You must be a small business entity, meaning that your farm’s aggregated turnover (annual gross income) does not exceed $2 million. Alternatively, if you do not pass this test, the total net value of your assets must not exceed $6 million.
- Active Asset Test: The asset you are selling—whether it’s the farmland or other business assets—must have been actively used in the course of carrying on your farming business for at least 7.5 years if you’ve owned it for more than 15 years. For assets held for less than 15 years, they must have been actively used for at least half the ownership period.
- Significant Individual Test: You or your spouse must have had at least 20% ownership interest in the farm during the period when the business was active.
- Retirement Exemption: If you’re aged 55 or older and selling the farm as part of your retirement, you may be able to access the Retirement Exemption, which allows you to exclude up to $500,000 of capital gains from taxation.
15-Year Exemption: If you’ve owned the farm for at least 15 years and you’re over 55, you may be eligible for the 15-Year Exemption. This allows you to disregard all capital gains on the sale, provided you meet the retirement requirements.
READ MORE CGT concessions eligibility overview | Australian Taxation Office (ato.gov.au)
The Benefits of Small Business CGT Exemptions
The small business CGT exemptions are designed to help business owners—including farmers—retain more of the proceeds from the sale of their business. These exemptions can reduce the tax payable, sometimes to zero. For example, if you qualify for the 15-Year Exemption, you may not have to pay any CGT on the sale of your farm, allowing you to reinvest that money into your next venture or retirement.
In addition to the financial relief, these exemptions also provide flexibility. The Retirement Exemption, for instance, allows you to sell the farm in a way that supports long-term retirement goals without the burden of a significant tax liability.
Seek Professional Advice
While the small business CGT exemptions offer considerable tax savings, navigating the eligibility criteria can be complex. It’s essential to seek advice from your Bentleys tax professional or financial advisor who can deal with your specific situation and ensure that you meet the necessary requirements. Proper planning and expert guidance can make a substantial difference in the amount of CGT you’re liable for and maximise the financial benefits of selling your farm.
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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.
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