For every business owner, there will come a time in your life when you need to sell off a particularly large asset. It might be that you no longer need it, or you’re changing business direction. It may even simply be to realise the wealth tied up in that asset.
So whether you’re selling property, your fleet, or even the business itself, it’s going to be a big sale. And, as business owners, we’re keenly aware that big sales like these attract capital gains tax.
The good news is that small business owners are entitled to access a range of capital gains tax exemptions. These can work to reduce the amount of capital gains tax you pay on the sale, or in some cases, eliminate it entirely.
Don’t leave your future tax planning to the last minute. Contact Liston Newton Advisory today and book in for a free strategy session to discuss how your business can safely navigate capital gains tax events.
Understanding capital gains tax for small businesses
Any time you sell a large asset for a profit, this is considered as making a capital gain. The capital gain is calculated as the difference between what you paid for the asset and the value for which it’s sold. This profit triggers a capital gain event, which then gets added to the assessable income of the entity that sold it.
So, when selling an asset like your business, this can be quite a large sum.
Luckily there are a number of capital gains tax concessions that business owners can access, which help to reduce the capital gains tax you’re likely to pay.
What CGT concessions are available for small businesses?
Let’s look at an example of why small business CGT concessions are so important.
Say you start a lawn mowing business from scratch. You start it by yourself and build it up to a successful team with a large client base. After a number of years, you decide to sell the business and focus on other projects. You find a buyer who offers $250k for the business, its assets, and the client base.
As you started the business from scratch, there was nothing paid for the asset originally, so this equals a capital gain of $250k. This $250k is then included as part of your assessable income for that financial year.
An extra $250k to your assessable income is a significant amount of tax to pay. This is why CGT concessions for small businesses are so important.
Here are the key capital gains tax concessions that you can access as a small business entity.
1. The 15-year exemption
The 15-year exemption is a big concession that can enable you to avoid paying any tax on capital gains. And it’s fairly straightforward. You qualify for the 15-year exemption if:
- You’ve owned your business or asset continually for 15 year or more, AND
- You’re at least 55 years old, AND
- You’re selling your business to retire.
This exemption enables you to disregard the entire capital gain you made on the sale of the asset.
So for example, say instead you were selling your lawn mowing business in order to ease into retirement. You can use the 15-year exemption to disregard the capital gain altogether, thereby avoiding adding the $250k capital gain to your tax assessment.
2. The 50% active asset reduction
The 50% active asset reduction is a CGT concession for small businesses that enables you to reduce the accessible amount of the capital gain by 50%.
To receive this exemption, the business or asset must be considered active, and must pass the active asset test. To qualify as active, the asset in question must:
- Have been actively used in the course of your business for at least half the time you owned it, OR
- If you owned the asset or business for more than 15 years, it must have been actively used for at least 7.5 years.
It’s important to note that this exemption isn’t available to companies.
You’ve decided to sell your lawn mowing business to move on to a new business venture. As you’ve owned the business for over 15 years, and it has been active for the entirety of this time, this sale qualifies for the 50% active asset reduction. This means that you’re only assessed on $125k of the $250k capital gain.
3. The retirement exemption
If you’re not eligible for the 15-year exemption, the retirement exemption is a good option for business owners looking for CGT concessions.
Unlike the name suggests, you don’t have to be planning to retire off the sale of your asset. The retirement exemption is designed for business owners looking to boost their retirement nest egg.
Under this exemption, business owners can disregard up to $500k worth of capital gain on their tax assessment. It’s a cumulative exemption too, so it can be used across multiple asset sales, up to the $500k limit.
For business owners looking to access this exemption, it works like this:
- You must be under 55 years old, and
- The full capital gain amount is then contributed to your nominated super fund.
It’s purely a super-boosting exemption.
And, it’s potentially even more beneficial for business owners over 55. If you’re over 55 and you choose the retirement exemption, you don’t need to contribute to any super fund. Instead, the entire capital gain is disregarded.
Again, you decide to sell your lawn mowing business to move on to another business venture. However, the business has been run on and off over the years, so it doesn’t qualify for the 50% active asset reduction. You opt for the retirement exemption instead.
As you’re not planning to retire and you’re under 55, under this exemption you’re able to take the full $250k from your business sale and put it directly into your super fund.
You’ve now boosted your retirement funds significantly, and there’s still $250k available under this exemption should you sell another large asset, and want to add more to your super.
4. The small business rollover concession
Under the small business rollover concession, you can opt to disregard the entirety of the capital gain if the profit is used to purchase a replacement asset. This means that the initial taxable cost base of your new business is reduced by the rollover amount, which in the future can work to reduce the CGT you pay.
To access this exemption, the replacement asset (or business) must be purchased within two years following the capital gain event, or in the 12 months prior. If a replacement asset isn’t purchased within this timeframe, then the capital gain is instead deferred until this time. The gain will then be assessed as part of that financial years’ income
Following on from our example, you’ve decided to sell your lawn mowing business to move on to a landscaping business. You buy the landscaping business for $350k, using the $250k profit from the sale of your old business as part of the cost base.
Under this circumstance, the $250k then won’t be added to your tax assessment, and you pay no CGT.
The final word
The ATO has put these provisions in place to ensure it’s still attractive for small business owners to sell their large assets. So when it comes time to sell yours, you’ll be able to use one or more of these concessions to reduce the impact of capital gains tax significantly.
But it’s important to do your research. Make absolutely sure that you qualify for the exemption you’re aiming to receive. Your tax adviser can guide you on how to maximise the CGT concessions available given your circumstances.