Australia’s Taxation Office (ATO) offers several Capital Gain Tax (CGT) exceptions specifically targeted towards small businesses to help their owners. These can offer plenty of financial benefits, so it’s worth looking into if you’re planning on selling your business anytime soon! However, there are also complex rules that you should know about as well.
The Board of Taxation reviewed small business CGT concessions in 2019, noting how important they were for small businesses thanks to their generous benefits and can even influence business decisions in the future.
Today we’re looking at everything you need to know about small business CGT concessions to hopefully help you better understand your options and help you future-proof your business.
What Do We Mean By GCT Concessions?
The Income Tax Assessment Act 1997 highlighted that eligible small businesses should be given access to four main CGT concessions when making a capital gain. These include:
1. 50% Business Reduction
The 50% business reduction gives you a large discount on your capital gain, letting you save a chunk of money on what you’re earning. It’s worth noting that this 50% business reduction is on top of the pre-existing 50% discount, so your taxable gain could effectively be reduced by an impressive 75%! As you can imagine, for a small business, this amount of savings could be life-changing.
2. 15-year Retirement Exemption
If your small business has owned an active asset for more than 15 years before selling it, the capital gain you receive might be exempt from tax altogether. However, to qualify for this exemption, the sale must be in relation to the business owner retiring either after 55 years of age or due to permanent incapacitation.
3. $500,000 Lifetime Retirement Exemption
If you’re eligible for this exemption, you might be able to claim on capital gains up to $500,000 across your lifetime.
4. Roll-over Relief
This relief allows you to defer the capital gain you’re owed if the amount you’ve earned is being used to buy another business asset, giving you more time to get your affairs in order before having to sell your old business. This is only suitable for specific circumstances though, so you’ll need to make sure your situation meets specific requirements.
How Can You Access These CGT Concessions?
To access these CGT concessions, your small business will need to meet a number of complex criteria noted in the Income Tax Act.
Pre-conditions
Firstly, you’ll need to set up a CGT event in regard to one of your assets, which is often either the sale or disposal of an asset. This must be classified as a ‘CGT asset’, which is usually most types of property, whether it’s tangible or not.
Gateway Provisions
Once your GCT event is up and running, your business will then have to go through a number of gateway tests to make sure it’s eligible. These include:
1. CGT Small Business Entity Test
The CGT small business entity test includes two parts, including:
- The taxpayer must have been actively operating the business
- The business must have a $2 million aggregated turnover or less
If your business doesn’t pass this test, you might still be able to qualify under the Maximum Net Asset Value test, where your total number of net assets must not exceed $6 million.
2. Active Asset Test
Once you’ve completed either of these two tests, the next gateway provision you’ll need to pass is the active asset test. This is making sure the asset you’re selling is actively used or ready to use once in the hands of its new owner.
It’s often simple enough to determine whether your asset is active or not, although some circumstances call for a more in-depth examination of facts and circumstances surrounding you and your business.
Once your business passes both these tests, it might be eligible for the CGT concessions, although further analysis might be necessary to determine which specific concession applies. For example, if you’re not of retirement age, the $500,000 lifetime retirement exemption or 15-year retirement exemption won’t be available to you.
How Can You Claim Small Business CGT Concessions?
If you think your business qualifies for one of the CGT concessions, then you can apply through the ATO’s website. However, we highly recommend consulting a professional before applying to make sure you’re not wasting your time. Also, claiming for a concession incorrectly can lead to an audit or even penalties, so it’s essential that you don’t accidentally claim something you’re not entitled to.
However, don’t let this put you off if you think you are truly eligible for one of the concessions as they can be so beneficial to many! One excellent way to protect yourself is by getting professional written advice, otherwise known as a Reasonably Arguable Position (RAP) paper. This can help protect you from penalties if the ATO decides that you’re not eligible for the concessions applied for.
Are There Any Limits For Claiming CGT Concessions?
Eligible businesses can apply for CGT concessions on each qualifying asset until the capital gain from that asset is completely reduced to nothing, so there are no limits in this sense. However, each type of concession does come with its own limit which you’ll be made aware of if you’re eligible to claim it. An example of this is the 15-year exemption, which requires you to be over 55 years of age before claiming. Another would be the $500,000 lifetime retirement exemption, which obviously only disregards up to $500,000 in capital gains.
Final Thoughts
Small business CGT concessions are incredibly helpful and beneficial to those who are eligible for them, but they also come with a lot of hoops to jump through. This is to prevent people who aren’t eligible from claiming and wrongly being awarded money that they haven’t earned. If you think you meet the eligibility criteria for one or more of the CGT concessions, we highly recommend you get in touch with a professional to help make sure you have a change in claiming.
Book A Free Strategy Meeting With A Business Accountant Today
We highly recommend seeking professional advice when considering applying for CGT concessions, and our small business accountants can help walk you through everything you need to know about your claim. We’ll go through your options and see if you have a rightful claim or not to save you plenty of time and worry when wondering if you should claim. We offer free strategy meetings at Walker Hill, so why not book one today to discuss your options?
