Business owners often have their personal wealth tied up in their business. When it’s time to realise this wealth and sell the business, capital gains tax can be a factor in the amount of wealth they can retain. Some business tax are unavoidable but there are many strategies you can implement now to minimise tax, even if the prospect of selling is still many years away. At Sky Accountants & Bookkeeper Ballarat, our goal is to empower you to become a better, more finance-focused and well-rounded entrepreneur. Contact us at email@example.com or 1300 328 855
Small business owners are entitled to several concessions that can reduce significantly or eliminate their capital gains tax upon the sale of their business. These concessions are important in keeping the wealth that you’ve worked hard for.
First, your business structure must be correctly set up. It is an important part of tax minimisation but often overlooked in the rush to set up the business. According to the ATO, individuals or trusts will qualify for a 50% discount if they hold an asset for a minimum of 12 months before selling it. This means only 50% of the capital gain in your assessable income will be taxed.
Note that companies are not entitled to a capital gains tax discount while partnerships don’t pay CGT. The individual partners determine the share of the capital gain to include in their assessable income. If you run a business from a unit or family trust, you qualify for the first 50% CGT discount and may still qualify for other small business concessions. If you have a company and hold company shares in another company, you won’t qualify for the first 50% discount but may qualify for other small business concessions.
To qualify, you need to be classified as a small business with either less than $2 million of turnover or net assets of less than $6 million. The entity claiming the discount must have net assets of less than $6 million as well.
When selling shares or units in a unit trust, the business must be a CGT small business entity with a revenue of $2 million or less or meet the $6 million net value asset test. This $6 million net asset test also applies to the entity holding the business. You need expert advice and careful planning to get this right.
Once qualified for the first 50% CGT discount, you can look into four other concession and choose which ones you want to use. One of these is the 15-year exemption. If you’ve continuously owned your active business asset for over 15 years and are retiring or aged 55 above, you can disregard the capital gains tax on the sale of your business and the CGT may be contributed to each CGT concession stakeholder’s complying super fund. It would not be considered as a non-concessional contribution if made within 30 days of the payment.
Another 50% discount can apply if you’re disposing of an active asset – a tangible or intangible asset held in the course of carrying on a business. To be considered active, it must’ve been active for at least half the time you owned it or if owned for 15 years or more, owned it at least seven and a half years. If the sale of your business qualifies as an active asset, your CGT will be reduced by another 50% on top of the aforementioned 50% general discount. You will only need to pay 25% tax on the CGT amount.
Another concession is the capital gains tax retirement exemption, which allows you to disregard up to $500,000 worth of capital gains from the sale of your small business. It is called the retirement exemption but no age limit applies and there’s no requirement to retire or stop doing business.
If you are under 55 years old at the time of the application of the concession, you need to contribute the capital gain amount into a super fund or retirement saving accounts. For those above 55, they can take the capital gain tax-free. This concession has a lifetime limit of $500,000 so you can claim the full $500,000 from the sale of a business or progressively use it on several business sales.
The last concession available is the roll-over concession. If you sell an active asset, you can rollover the gain into a replacement asset so the cost base of the latter is reduced by the capital gain rolled over. The sale must be between one year prior to and two years after the CGT event in the income year of the rollover.
Small business CGT concessions can be substantial and important in tax planning. The tax laws can be complex and require careful planning. Make sure you get it right from the start. We advise our clients to start preparing early so they can make the most of the concessions.
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