The Small Business CGT (Capital Gains Tax) Concessions are designed to provide tax relief to the owners of small businesses when they sell shares in a business, goodwill, or property. If a small business can access these concessions, then it makes it easier for the business owners to retire from, or re-structure their business. There are certain conditions that a business and the individual must meet to access the concessions, briefly outlined below.
- Small Business Entity Test
Firstly, the business must be a small business entity, meaning that the business must have an aggregated turnover of less than $2 million in the year the concession is claimed. Aggregated turnover is the total income of the business, and any connected entities or affiliates.
- Active Asset Test
Secondly, the asset being sold must be an active asset, meaning that the asset must be used while carrying on a business. Examples may include, machinery or equipment, vehicles, shares in a small business or goodwill. If the asset is held primarily for investment purposes (e.g., rental property), it won’t meet this test.
- Significant Individual Test
Thirdly, the individual claiming the CGT concession must satisfy the significant individual test. This means the individual must have an ownership interest in the business, usually at least 20%, either directly or through entities such as a trust or company. This ensures that the test benefits those with a material stake in the business, rather than passive investors.
If the above conditions have been met, then the CGT concessions are able to be accessed, provided they meet the further requirements related to the concession they wish to use. Here is a look at the available concessions:
The 15-Year Exemption
The most beneficial/desired concession is the 15-year exemption, which allows the full CGT liability to be waived if the business has been owned for at least 15 years and the owner is aged 55 or older.
50% Active Asset Reduction
The 50% active asset reduction effectively reduces the capital gains, and the corresponding tax payable by 50%. This concession can be used in conjunction with other concessions, such as the retirement exemption or the rollover relief, if you qualify.
Retirement Exemption
The retirement exemption provides a CGT exemption up to a lifetime limit of $500,000, provided that the money is being used to fund retirement. If the individual in question is under the age of 55, the amount must be paid into a super fund.
Rollover Relief
The rollover relief concession provides a deferral from paying CGT, provided that a replacement asset is purchased within two years. Tax will be paid when the replacement asset is sold or disposed of.
The Small Business CGT Concessions can be an important tool to reduce tax liabilities when selling a business or its assets. However, understanding what is required to access these concessions, and when they are available to you is essential to maximise the tax benefits. The Small Business CGT Concession rules can be complex, especially where trust and companies are involved, so it’s important that you get some advice before making any decisions.
Author: Molly Ingham
Email: molly@faj.com.au
