How much capital gains tax (CGT) you pay on selling a business in Australia depends on if there is a capital gain or loss at the end of your sale. You might also be eligible for a 50% discount on your capital gains tax, reducing your final bill.
In this blog, we cover calculating capital gains tax on selling a business, whether you are entitled to small business CGT concessions, a reduction in your tax, and everything else a business owner needs to know before selling your business.
What Is Capital Gains Tax (CGT)?
Capital gains tax (CGT) is a tax you pay on profits. These profits are from disposing of assets like investments, property, and shares. Despite being called capital gains tax, this is part of your income tax and is not a separate tax.
Disposing of assets, mainly when you no longer own the asset, can trigger a CGT event. This involves reporting capital gains and losses as part of your income tax return.
Capital gains will increase the tax you must pay, while capital losses can reduce the tax you must pay. Gains and losses must be included to calculate the CGT you must pay.
How Do You Calculate Capital Gains Tax On Selling A Business?
Calculating capital gains tax on selling a business can be done by following the step-by-step guide below.
Step 1 – Work Out What You Received For The Asset
Your capital proceeds must be calculated; this is what you receive when you sell the asset or if another CGT event happens. The assessable capital gain is needed to determine how much capital gains tax you will pay on the sale of the business.
The capital proceeds are the asset’s market value if you gave it away or sold it to a friend for less than its value.
Step 2 – Work Out Your Costs For The Asset
This is your cost base and is what it costs you to acquire the asset and other costs you have had to acquire, hold, and dispose of the asset. You will need to work out the loss amount if you made a loss on the asset.
Any gains made on the asset that was acquired before 21 September 1999, you should index the costs for inflation up to that date to reduce your capital gain. It can give you a lower net capital gain in some situations.
Step 3 – Subtract Your Costs From What You Received
Take away your costs in step two from what you received in step 1. A number higher than zero means you have a capital gain for the business. A number lower than zero means you have a capital loss for the business.
Step 4 – Repeat Steps 1 To 3
This needs to be done for every business or asset you have sold.
Step 5 – Subtract Your Losses From Your Gains
You can skip to step seven if you have no allowable capital losses and if you do not have multiple assets being sold.
Net capital losses carried from previous years should be subtracted first. You can choose which gains to subtract losses from, too. Any capital gains not eligible for the capital gains tax discount should have the losses deducted from first to give you a lower CGT.
Look at the remaining amount; if it is higher than zero, follow the next step. Your capital loss is a remaining amount lower than zero, and you can head to step seven.
Step 6 – Apply CGT Discount (If Applicable)
A capital gain can be eligible for a 50% discount on individuals and trusts if you are an Australian resident and owned the business for at least twelve months.
Step 7 – Report Your Gain Or Loss
In your income tax return, you must report the net capital gain and pay the tax at your usual marginal income tax rate. For a capital loss, you can carry it forward to reduce capital gains made in future.
How To Work Out If My Asset Is Eligible For A 50% CGT Discount?
The CGT discount applies to Australian residents who have owned the asset for at least twelve months.
For your asset to be eligible, you must own it for at least 12 months before the CGT event. The event is where you made a capital gain or loss, excluding the day of acquisition and the CGT event.
In some cases, you can count an asset’s previous ownership towards your 12-month ownership period, including:
- You acquired it through a deceased estate on or after 20 September 1985
- You received the asset through a relationship breakdown
- You required the asset as a rollover replacement asset for one that was destroyed, lost, or compulsorily acquired
There are some exemptions to the 50% CGT discount outlined below:
- Your asset is your home that was used first as a business or rental less than 12 months before disposing
- You have used the indexation method instead of the CGT discount
- You are a foreign or temporary resident who has had capital gains after 8 May 2012
- You have created a new asset as a result of a CGT event
- You are converting the income asset into a capital asset to claim the discount
Does The 50% Discount Apply To Companies?
The 50% discount can apply to some companies that pay capital gains tax. Australian trusts can access the 50% discount, and complying super funds can have a discount of 33.33%.
What CGT Concessions & Discounts Are Available?
There are a few capital gains tax concessions available for small businesses. The small business CGT concessions are designed to reduce, defer, or disregard some or all of a spatial gain from an active asset used as part of a small business.
The following concessions are available:
- Small business 15-year exception
- Small business rollover
- Small business 50% active asset reduction
- Small business retirement exemption
These concessions have rules that must be followed, but some basic eligibility conditions apply to all concessions. This includes not being a depreciating asset included in your income and capital gains or losses from a depreciating asset used for a non-taxable purpose. You will not qualify for a small business CGT concession because it reflects the non-business use of the asset.
You must have an active asset that passes the active asset test and meets additional conditions depending on the concession.
The retirement exemption is made up of four specific CGT concessions. The retirement exception allows small business owners under 55 to transfer the proceeds from the sale into their superfund or retirement savings account. In contrast, the 15-year retirement exemption exempts you from the entire sum of the CGT.
A 50% active asset reduction allows you to reduce the CGT on the sale of an active asset by 50%. Finally, the rollover exception will enable you to defer capital gains tax on a sold asset to a later table. Check the criteria of the small business concessions before filling in an application.
What Else Can Impact CGT When Selling My Business Assets?
Several factors can impact the CGT of your asset sale of a business; we have them outlined below.
Earnout Arrangements
This refers to a contract that can be made if the business is old or the financial goals are met. The buyer must pay the seller any additional amounts if the business assets fare well.
Buy Or Sell Agreements
These cover the transfer aspect of the sale and the funding arrangements.
CGT Cap Election
These can affect your CGT when you have contributed to your superannuation fund during the financial year.
Rollover Statement
The documentation and information about the superannuation fund of the seller can ease the rollover process.
Are There Any Other Lodgements Or Reporting Required When Selling A Business?
You must lodge final taxable payments and annual reports when selling your business. These must be lodged for contractors’ fees until the business is sold or closed.
You must also keep business records for five years after the records are obtained or prepared when selling your business. This includes sales and purchases, payments to other companies, and employee payments.
How Can I Work Out What My Business Is Worth?
An asset sale or selling your business can be tricky, especially if you don’t know how much your existing asset is worth. Thankfully, Walker Hill offers a fantastic service, valuing your business to help you see what your business is worth and get the true value for your business.
Once you have the value for your business, you can sell your asset for its worth. With the knowledge you have gained about tax implications from selling your business today, you can add the capital gain or loss of selling your business with your taxable income tax rate and pay your capital gains tax altogether with your tax bill.
