Making the most of small business capital gains tax concessions
Posted by Northadvisory on October 21, 2019
As a small business owner, it’s important that you understand the capital gains tax (CGT) concessions available from the government. Martin van der Saag, North Advisory Founder and Strategic Advisor, discusses the different types of concessions available and how we can help maximise your eligibility.
“Every business owner who thinks they might want to sell their business at some point in the future needs to talk to their accountant about their plan… because the small business capital gains tax concessions are really generous. But they are very complex.
If you take off down one path from the beginning, you may be eligible… but if you go down the wrong path, you might miss out.
Why you need to do the planning is because, essentially, you could pay zero tax on the sale of your business… and it is then possible to put that money into your superannuation. There’s a double benefit there… not only could you pay no tax… you are also not constrained by the superannuation contribution restrictions.”
The first step when determining whether you are eligible for the CGT concessions is to confirm the type of business you are selling… whether a sole trader, a partner selling their equity in a partnership, a business from within a company, shares of a company or units from a trust. Plus, you must also meet an ‘active assets’ test.
Once you have determined ‘what’ you are selling, there are two more straightforward tests. You must pass one of these in order to be classified as a small business and therefore meet the eligibility conditions.
- The annual turnover of the business, and any connected entities, is under $2 million.
- The assets value of the business, and any connected entities, is under $6 million. This excludes private assets of the business owner, such as superannuation or a main residence.
“Once we have confirmed that you meet the eligibility conditions as a small business there are four different concessions you can look at to reduce your tax liability.
These are in addition to the standard CGT 50% discount that you automatically receive if you make a gain on an asset you have owned for more than 12 months.”
50% active asset reduction
You can reduce your CGT on your active assets by a further 50%. This concession is automatically applied once you meet the conditions. Martin explains how this works:
“If we work with the example of a $2 million capital gain, the standard 50% discount leaves us with a $1 million gain… the 50% active asset reduction decreases the gain to $500,000.
For some people, this is a sufficient concession and they will pay tax on the 25% capital gain, but there are a few more entitlements that you could make use of to help reduce your tax liability.”
Small business rollover
Any capital gain remaining after the first two concessions are applied can be negated by purchasing another asset to the value of the gain, within two years of the CGT event. Martin continues:
“This means, in our example, if you have the $500,000 and you purchase another business to the value of $500,000 within two years, your gain no longer exists… you’ve rolled it over into another business.”
The retirement exemption concession is applicable to a lifetime limit of $500,000. Anyone who has an assessable capital gain can access this concession, but for people under 55 years old, the exempt amount must be paid into your superannuation. Martin explains this is more detail:
“If you are under 55, again looking at our example of a $2 million capital gain, the remaining $500,000 can be contributed into superannuation, to not pay tax. However, if you are 55 or over at the time of the CGT event, you don’t need to put it into super and you can still pay no tax.
But if that same person had an investment property and they made a $2 million profit… regardless of their age, they would have to pay up to $500,000 in tax. This highlights the benefits of having a business and receiving concessions… you can still make the $2 million profit and pay no tax.
The government acknowledges that small business owners put everything into their businesses over their working career and often don’t put a lot into super… so by the time they come to retire, they may be light on retirement funds. These concessions enable them to make up for past years when they put money into their business rather than into super, and standard contribution caps are not impacted by this transaction.
This is a great planning policy that the government has allowed for small business owners.”
This concession is the most complex and challenging to achieve, but it is also the most rewarding.
If you have owned your business for 15 years or more, are over the age of 55 years and sell your business in order to retire, your entire capital gain will be exempt. You can also pay the entire gain amount directly into your superannuation with no tax liability. Martin expands on this final concession:
“You do need to retire in order to be eligible… so it is difficult to satisfy the requirements, but it is the most generous concession.
If you sell your business for $1.5 million, immediately there’s no tax… plus you can put the entire amount straight into super. Then, as you receive your retirement income in pension phase from super… there’s no tax in that environment either.
This is definitely something you need qualified professional help to manage.”
Speak to your advisor
As small business tax accountants, we understand the intricacies of navigating the small business CGT concessions. We look at the big picture and determine where there are opportunities to help you achieve optimal results when you sell.