As a small business, utilising every penny you have is essential, especially when it comes to tax. Thankfully, there are several ways that you can save on tax, one of which is by using capital gains tax concessions, which are available to small businesses to reduce the capital gain on disposable assets.
In this article, we’ll break down how capital gains tax works and what you need to do to be eligible for them.
What Are Small Business CGT Concessions?
Before we clarify what small business capital gains concessions are, you need to have an understanding of what capital gains and capital losses are. According to the ATO, capital gains tax is what you pay for disposing of assets like property, investments, crypto assets or shares. However, if you sell your assets for less or make a loss holding them, this is considered a capital loss. The higher your capital gain, the more tax you’ll likely need to pay. Capital losses can be offset against your capital gain in your current financial year or next to reduce the capital gain tax amount you need to pay.
Here’s where small business CGT concessions come in. To help small businesses succeed, especially in their first few years, the Australian Taxation Office (ATO) introduced Capital Gains Tax Concessions, which allow small businesses to reduce or disregard any capital gain they may receive from an active asset.
Types of Capital Gains Concessions
There are four types of capital gains concessions, each with its own criteria for eligibility and function. Here’s what you need to know about each CGT concession.
Small Business 15-Year Exemption
The 15-year exemption CGT concession is for anyone over the age of 55 years old who has chosen to retire or is unable to continue working and who has owned their business assets for over 15 years. These individuals will not pay capital gains tax if they meet the following criteria in addition to the basic eligibility conditions:
- They must be older than 55 years of age
- Their assets must be an active asset owned for 15 years by them
- Their claim for the concession must coincide with the event leading them to retirement
There are modified rules regarding the CGT concessions when it comes to marriages and the transfer of assets under the rollover provisions. When applying for the 15-year exemption, you don’t have to apply capital losses and gains, but in the event that you make a capital loss, you can use it to reduce a capital gain in the future.
Small Business 50% Reduction
The small business 50% reduction concession is automatically applied to small businesses that have owned assets for over 12 months and meet the basic eligibility conditions. You can choose to rather use on of the other concessions over the 50% reduction, it depends on your personal and business goals. Here’s how it works: when you apply your current or past years’ capital losses, the remaining capital gain will be split by 50%, reducing the capital gains tax you need to pay by half.
While the 50% reduction is applied automatically for most eligible businesses, there are special rules for trust beneficiaries. Beneficiaries of a trust must gross up and multiply their share of capital gain received from a trust by two if the CGT discount or the 50% reduction has been applied. In addition to both the concession and discount being applied, the beneficiary must multiply the capital gain by four.
Then, their grossed-up share of the capital gain will be used to work out their net capital gain. That’ll then be added to your assessable income and then reduce the trust capital gain by the capital losses from the beneficiary and by adding the CGT discount and the 50% asset reduction.
Small Business Retirement Exemption
The retirement exemption allows for the capital gains of disposed assets to be completely disregarded up to an amount of $500,000 for individuals, a company or a trust. Eligible candidates can choose to disregard their whole capital gain or a part of it if they meet the basic conditions to be eligible for the concession or if they meet any extra conditions for small business. Unlike the concessions above, the retirement exemption doesn’t require you to stop working, sell your business office holdings or halt business activities.
When choosing the Small business retirement exemption, you need to keep a written copy of the amount you would like to disregard. Keep in mind that if your capital gain exceeds the amount you’ve chosen to disregard, the excess won’t qualify for the exemption.
Small Business Roll Over
The small business roll over relief concession a small business entity to defer capital gains until a later CGT events occurs such as selling an active asset an replacing it with another. When you purchase a replacement asset or spend capital on improving a current asset, your gains can be deferred to a later point when you choose to sell the asset.
Keep in mind that businesses who choose to use the rollover concession will not have their capital gain added to their assessable income for that financial year until the deferred CGT event occurs. However, if you do not purchase a replacement asset or incur costs for improvements on your asset within 2 years of the CGT event, consequences for choosing the rollover option may occur. Here’s what you need to be eligible for the small business rollover concession:
- You need to meet the basic eligibility conditions
- You need to choose the rollover amount for the gain made from selling an asset
Basic conditions for being Eligible for Small Business CGT Concessions
For a small business to be considered eligible for the concessions above, it first needs to meet the following basic conditions. Firstly, it must be a small business with an aggregated turnover which is less than $2 million and have an active business asset. You’re also considered eligible if you’re not running a small business but affiliated with one, or if you’re a partner and the asset is a partnership asset and finally if the asset is yours but is used within a partnership business.
Your asset must meet the active asset test to be considered an active asset. This means that it must be an active asset of years for 7.5 years during the test period or half of the period if you’ve owned the business for 15 years. The test period begins as soon as a CGT event occurs, which is connected to the asset and is completed when you dispose of the asset.
For assets that are shared in a company, you need to either run a business shortly before you purchase your asset or meet the maximum net value of the asset value test in addition to meeting the basic conditions. Or you would have had to be a concessions stakeholder in a company or trust before the CGT event.
For more information on the basic eligibility conditions for small business CGT concessions, check the ATO’s eligibility overview.
Applying Small Business CGT Concessions
When you apply for capital gains concessions, you can apply for each active asset that you have, which is eligible for the concessions until your capital gain is reduced to zero. Your assets are all assessed individually for their concession eligibility, allowing you to apply concessions to each of them. For the 50% active asset reduction, it’ll apply automatically if you’re eligible, however, you can choose one of the other concessions if you’d prefer. Remember, for the retirement exemption, you need to keep a written record of the capital gain amount that you want to disregard.
Frequently Asked Questions for CGT Concessions
How do the CGT concessions affect your super contributions?
For small businesses with the 15-year exemption, you are able to contribute amounts to a super fund from the exemption without changing your non-concessional contributions limit in any way. The same can be done for the small business retirement exemption.
Can CGT concessions apply to other investments other than business assets?
Yes, while the four small business CGT concessions mentioned above are related to business assets, there are broader CGT concessions and discounts for other investments available.
Are there any limits for claiming CGT concessions?
Eligible businesses can use concession for each eligible asset until that asset’s capital gain is reduced to zero. However, limits are placed on each type of concession type, for example the 15 year exemption requires the owner to be older than 55 and the retirement exemption limits the amount it would disregard to $500,000.
