Recently, the ATO has noticed that some larger and wealthier businesses have mistakenly claimed small business CGT concessions when they weren’t entitled. By incorrectly applying the concessions these businesses were able to either reduce or completely eliminate their capital gain. The ATO has urged all taxpayers that have applied the small business CGT concessions to check that they were eligible, this firstly means that the business should meet the definition of a CGT small business entity or the maximum net asset value test.
If you’re a small business owner and the pandemic has made you reassess your future, whether it be retirement or selling your business and starting afresh somewhere else, just remember that there may be capital gains tax (CGT) consequences to such a move. However, the tax law does provide four concessions to enable eligible individuals to eliminate or at least reduce the capital gain on a CGT asset provided certain conditions are met.
To be eligible to apply these CGT concessions, the business must have a maximum net asset value of less than $6m (ie the net value of assets owned by the business and related entities), or failing that, the business must qualify as a CGT small business entity.
The definition of a CGT small business entity is essentially the same as a small business entity except that the aggregated turnover threshold to qualify is $2m and not $10m.
In addition, the CGT asset that gives rise to the gain must be an active asset, which just means it is an asset used in carrying on a business by either you or a related entity. It should be noted that shares in a company or trust interests in a trust can qualify as active assets although additional conditions may apply.
Once the basic conditions are satisfied, your small business can choose to apply one or all of the four CGT concessions provided the additional conditions to each concession is also met. Meeting all the conditions means that the concessions can be applied one after another to completely eliminate the entire capital gain in some cases. The concessions consist of the following:
- 15 year exemption – the business may be entitled to a total exemption on a capital gain if the asset has been continuously owned for at least 15 years up to the time of the CGT event. Or in cases where the CGT asset is a share or trust interest, the company or trust must have a “significant individual” for at least 15 years. For individuals (ie sole trader businesses), there is an additional condition that they must be at least 55 years of age and the CGT event occurs due to either retirement or incapacitation.
- 50% reduction – the business may be entitled to an automatic 50% reduction of a capital gain if the basic conditions are satisfied, and the asset does not have to held for more than 12 months.
- retirement exemption – a business that is an individual, company or trust, may be able to choose to disregard all or part of a capital gain made from a CGT event, up to a lifetime limit of $500,000. Note, there is no age limit on using this concession, nor is there any requirement to retire, even though it is called the retirement exemption. However, individuals under 55 who apply this exemption must rollover the exempt amount to a complying super fund.
- roll-over concession – a business can choose to roll-over all or part of the capital gain and then acquire a replacement asset if the basic conditions are met. In the event a replacement asset is not acquired within the required timeframe, the rolled over capital gain will be reinstated.
The 15 year exemption takes precedence over the other concessions listed and is applied without first having to use prior year capital losses. If the 15 year exemption cannot be applied, then depending on the circumstances of the capital gain, the other concessions can be used in any order to reduce the amount of tax payable.
If you run a small business and are thinking of retirement or selling the business, we can help you firstly work out whether you qualify for these concessions, and if so, how to use them in the optimal order to reduce or eliminate completely the potential capital gain. Contact us today for expert help and advice.