Business sales tend to result in a large capital gain. As such, they'll normally result in a large amount of tax payable. Luckily there are some quite useful CGT concessions available, which enable you to reduce your CGT by 50% or more.
But what about if you own multiple businesses?
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Am I eligible for CGT concessions if I have multiple businesses?
In short, yes—you may still be eligible for the small business tax concessions if you have multiple businesses.
That’s because the concessions aren’t based on a specific number of businesses. Rather, they focus on the size (revenue) and value of those businesses instead.
There are a number of qualifications you need to meet in order to be eligible for the small business CGT concessions.
Revenue and asset tests
The two main criteria are known as the $2 million revenue test and the $6 million asset test, and they mean:
- Your revenue must not exceed the threshold of $2 million; OR
- Your net assets must not exceed $6 million.
These tests are performed on a ‘group basis’. This means they include the revenue or net assets of any entities or individuals connected with you, your business, or your affiliates.
So while having multiple businesses doesn’t explicitly exclude you from accessing the concessions, it may indirectly cause you to be ineligible based on these criteria. It’s the value of the revenue earned by the other businesses associated with you that causes you to fail the relevant threshold tests. Or, it can be the value of the assets owned by other entities connected with you.
Here’s how it works.
John owns his own business, Business 1 Pty Ltd, which produces soaps and other personal care products. Its revenue is approximately $1.5 million per year.
Business 1 also owns 60% of Business 2 Pty Ltd, which is a retail store that sells some of Business 1’s products, as well as home decor products. Business 2 sells $1 million of product each year.
Business 1’s sales contain $200,000 of sales made to Business 2.
Now, Business 1 is planning to sell the personal care products business to a new owner. They want access to small business CGT concessions in order to reduce their assessable capital gain.
At present, they can’t pass the $2 million revenue test as their grouped income is $2.3 million. As Business 1 owns 60% of Business 2, Business 2 is considered to be connected to Business 1. Therefore, for the purposes of the small business concessions, their income is grouped.
As a result of the grouped income, Business 1 won't pass the $2 million revenue test. So now, they’re going to investigate whether or not they can pass the $6 million net asset test to access the small business concessions.
But what if the sales between Business 1 and Business 2 was $750,000 instead of $200,000?
If this was the case, then Business 1 could pass the $2 million revenue test. Their intercompany revenue would be removed for the purposes of the grouped revenue calculation. Therefore the total revenue on a grouped basis would be $1.75 million.
In this circumstance, Business 1 passes the revenue test, and can now investigate the other criteria that would allow them to access the small business CGT concessions.
Active asset test and other eligibility
Other eligibility criteria state that the asset, in this case, your business, must be an active asset. This means it must have been a business asset, or an asset used in the course of business, for either:
- 7.5 years continually; or
- If owned for less than 15 years, at least half its ownership period.
As well as this, if you’re selling shares in a company or selling units in a trust, there are other modified rules to pass before you can access the concessions. Contact your financial adviser if you want to discuss these ones in more detail.
What are the small business CGT concessions and exemptions?
To make things more difficult, within reach of the small business CGT concessions there are different rules that apply, too.
But provided you meet all the eligibility criteria, you may be eligible for some of the following concessions.
50% general discount
The 50% general discount isn't specifically a small business CGT concession. It's a general concession that applies to capital gains. Therefore the revenue test and net asset test don't need to be passed in order to access this concession.
You can receive a 50% reduction on your capital gain if:
- You owned the business for 12 months or more; AND
- You’re an Australian resident for tax purposes.
For many, this is the easiest way to reduce the CGT they pay on their business sale.
If you’ve owned your business for at least 15 years or more continuously, then you may be eligible to receive an exemption for the entire capital gain.
However, you can only be eligible for this exemption if you’re over 55, and the sale is in connection with your retirement.
Small business 50% active asset reduction
If you pass either the revenue test or the net asset test, you may be eligible to receive a 50% reduction to your capital gain. This is calculated after any capital losses have been applied, and once the 50% general CGT discount has been applied.
You don’t actually have to be retiring to access this exemption. Rather, money from the sale of your business is being put toward your retirement.
The retirement exemption allows up to $500,000 of your assessable capital gain to be exempt from CGT if you contribute it to your super.
If you’re under 55, this sum goes directly into your super. If you’re over 55, you have a choice. You can put it directly into your super, or take it as cash.
Small business rollover concession
With this CGT concession, you may be eligible to disregard the entire capital gain—but only if the profit is rolled over into a replacement business asset. In this case, a new business.
This means that the initial taxable cost base of your new business gets reduced by the amount you’ve rolled over into it. This also enables you to defer the CGT you would otherwise pay now, and it's likely to be paid at a future date.
To be eligible for this concession:
- You must buy the replacement business within the 12 months prior to selling; OR
- Within the two years following the sale.
If you don’t purchase a new business within this time, then the capital gain then gets assessed as part of that financial year’s income.
How to apply for small business CGT concessions
The application process for accessing small business CGT concessions is generally undertaken as part of your tax return. You complete the capital gains income and schedules sections with the appropriate information, and this then discloses the concessions you’ll be using.
Some circumstances, such as the retirement exemption, does require additional documentation. In this case, you’ll need to provide the relevant documentation to your nominated super fund so they know that your contribution is in relation to this CGT concession.
The final word
You asked the question, ‘Am I eligible for CGT concessions if I have multiple businesses?’
In summary, yes. You can still access CGT concessions if you own multiple businesses. You’re assessed on the grouped income of your business ventures, or the combined assets.
The important thing is to know where you stand, to ensure you have a clear understanding of your revenue, assets, and your CGT concession eligibility.