Your business is your retirement nest egg. You have worked hard over the years and are now ready to sell.
Chances are you may be sitting on a capital gains tax time bomb. The good news is there is something you can do about it. The government acknowledges this dilemma faced by all small business owners. To address this problem, they created a number of concessions applicable to the capital gains tax payable. These are the 50% discount and the Small Business CGT Concessions. Since their introduction, there is now an opportunity for the CGT to be reduced and/or eliminated on sale.
General CGT concessions – The main concession available is the 50% general discount. This applies to most CGT assets and is not unique to small businesses. In most circumstances, it allows you to halve your capital gain and only pay tax on that half. Some eligible assets include residential and commercial property, shares, and goodwill.
The key qualities of the concession are:
• the relevant asset must be owned for a period greater than twelve months;
• individuals, partnerships, trusts (conditions apply) and complying superannuation funds are eligible;
• the discount is 50% for individuals, trusts and partnerships and 33.33% for complying superannuation funds; and
• the discount is applied to non-indexed capital gains only
For example, Spencer purchased a rental property at Southport in February 2005 for $350,000, including costs. He rents it for just over seven years and sells in April 2012 for $520,000, after costs. He derived a $170,000 capital gain in 2011/2012. Spencer is eligible to apply the concession as follows:
Capital gain derived $170,000
(Less) 50% general discount ($ 85,000)
Net assessable capital gain $ 85,000
The $85,000 is declared in Spencer’s tax return. It’s added to his other income (his salary) and taxed at his marginal rate. Assuming Spencer was on the top tax rate of 46.5%, the taxation saving available to him would be $39,525.
The sale of a business, however, can go one step further and attract a 0% tax rate under the small business CGT concessions. These are outlined below:
Small business CGT concessions – When a business is sold, there are four small business CGT concessions that may apply. These are the:
– 15-year exemption;
– 50% active asset reduction;
– retirement exemption; and
– business roll-over relief.
Basic conditions and eligibility – Before applying these concessions, a number of tests must be satisfied in order to confirm eligibility. Because the small business CGT concessions are so attractive, it is vital they are passed. The tests are:
– The maximum net asset value test (or the turnover test); and
– The active asset test
Both tests must be satisfied. If you fail one, then you will not be eligible for any of the concessions.
The maximum net asset value test or turnover test – To be classified as a small business, the group involved must have net assets of less than $6 million. Certain assets are excluded from this (such as your home). Failing this, you can rely on the turnover test that requires the group to have a gross turnover of less than $2 million.
The active asset test – This test means the asset in question must have been actively involved in a business. If you are selling the business itself, this test is automatically passed.
The concessions – 15-year exemption – A capital gain made by a small business entity from a CGT asset it has owned for at least 15 years will be disregarded in full. It will be completely CGT exempt.
50% active asset reduction – The CGT made on an active asset can be discounted by a further 50% after the general CGT 50% discount. This brings the assessable capital gain down to only 25% of the original value.
Small business retirement exemption – The CGT can be elected to be exempt if the capital proceeds from the sale are used in connection with retirement at the time of sale. The implementation of this depends on whether the individual is under or over age 55 at the date of sale.
For example: Edward and Jake (in their early 60s) are partners in a partnership that operate a management rights business in Ballina, purchased in August 2008. They are considering selling the business in 2011/2012 and retiring. It’s estimated they will derive a $300,000 capital gain upon sale. Both partners satisfy the basic conditions.
Capital gain derived $300,000
The partners can elect the following concessions:
(Less) 50% general discount ($150,000)
(Less) 50% active asset exemption ($ 75,000)
(Less) retirement exemption ($ 75,000)
Net assessable capital gain $nil
The partners have been eligible to access three successive concessions, thereby reducing their capital gain by 100%. Assuming Edward and Jake are on the top marginal tax rate of 46.5%, the total taxation saving available would be $139,500 or $69,750 each.
Small business roll-over relief
This concession allows a capital gain to be “rolled” into the purchase of a new business or business asset. This is generally more attractive for those under age 55 and not looking to immediately retire. The replacement asset must be acquired one year prior or two years after the CGT event.
For example: Ben and Ann (in their late 40s) are beneficiaries/controllers of a family discretionary trust that operates a management rights business in Gold Coast, established May 2004. They plan to sell the business in 2011/2012 and relocate to Cairns, where they will purchase a boating business for $1,450,000 within two years in the same family trust.
They will derive a $900,000 capital gain upon selling. Both individuals satisfy the basic conditions.
Capital Gain derived $900,000
They can elect the following concessions:
(Less) 50% general discount ($450,000)
(Less) 50% active asset exemption ($225,000)
(Less) roll-over exemption ($225,000)
Net assessable capital gain $nil
Upon turning 55, Ben and Ann may also take the net $225,000 roll-over amount tax-free from the Gold Coast management rights business sale together with any capital gain from the Cairns business, if they both retire at say age 58, up to a threshold limit of $500,000 each or $1 million combined on a cumulative basis.
Conclusion – Looking towards the future, it is vital your business is structured effectively to take advantage of the CGT concessions. You want to ensure you have access to the concessions that allow you to sell your business tax-free. By the time you sell, it’s too late. A full review of your structure should also extend to new assets purchased.
In conclusion, you need to speak with your accountant before you sell to calm your nerves. Too many times we hear from vendors: “I am concerned if I sell my property or business I will have to pay too much in capital gains tax.”
Generally speaking the tax payable, if any, is far less than first envisaged by the vendor.
Peter Meyers is a chartered accountant and tax agent in public practice on the Gold Coast. He holds a Bachelor of Commerce degree from the University of Queensland and a Hotel Management degree and specialises in taxation, property and management rights.
AccomNews is not affiliated with any government agency, body or political party. We are an independently owned, family-operated magazine.