Please note: This article was written in 2019. Contact our Nexia team for the latest advice.
For many people, tax is confusing. Throw another complicated layer of what is Capital Gains Tax (CGT) as part of that tax equation and you wonder why you can’t work out your personal tax – you are not alone. The majority of Australians would not be able to work out their tax payable let alone how much capital gains to be included in your annual tax filing. Living life as a small business owner can make things seem even more complicated, with worries about maximizing cash flow and minimizing tax obligations even more important.
To understand what impact CGT may have on your business, it’s important to first be clear about what it is – and what it’s not.
Put simply, CGT is the tax that you must pay on any capital gain. Don’t think of it as a separate, unique tax – really, it’s just part of your total income tax.
Common ways you may make a capital gain or loss is by selling off assets. These assets may include:
- Property
- Shares
- Businesses
CGT is governed by what is known as CGT events. A CGT event is when you either sell or dispose of an asset to another party.
This can include:
- Selling or giving away an asset to someone else
- A loss of one of your assets or one of your assets being destroyed
- The cancellation or surrender of shares you own – or when shares you own are redeemed
- A change in your status as an Australian resident
- A company makes a payment that is not a dividend to you as one of the shareholders
- If you run your business from your home, there may be capital gains tax implications if that home is sold
1. For the small business CGT concessions, there are some basic conditions that must be adhered to. These include:
- You are registered and recognized as a small business entity – officially defined as “an individual, partnership, trust or company with aggregated turnover less than $2 million”.
- You do not carry on business (other than as a partner) but your CGT asset is used in a business carried on by a small business entity that is your affiliate, or an entity connected with you.
- You are a partner in a partnership that is a small business entity, and the CGT asset is an interest in a partnership asset (partnership assets) or an asset you own that is not an interest in a partnership asset, which is used in the business of the partnership.
- You meet the maximum net asset value test which is currently $6M
2. The specific asset must be an active asset that is a CGT asset that you own and:
- you use it or hold it ready for use in the course of carrying on a business (whether alone or in partnership) or,
- it is an intangible asset (for example, goodwill) inherently connected with a business you carry on (whether alone or in partnership).
3. If the CGT asset is a share in a company or an interest in a trust, another of these basic conditions must also be met:
- The entity claiming the concession must be a CGT concession stakeholder in the company or trust.
- You are a significant individual in a company or trust if you have a small business participation percentage in the company or trust of at least 20%. This 20% can be made up of direct and indirect percentages.
- A company or trust meets the significant individual test if it had at least one significant individual just before the CGT event.
- CGT concession stakeholders in the company or trust together have a small business participation percentage in the entity claiming the concession of a minimum of 90% (known as the 90% test)
This 90% test applies when there is an interposed entity existing between any CGT concession stakeholders and the company or trust that holds the shares or interests.
CGT Concessions for Your Small Business
When it comes to CGT concessions that impact on your small business, there are 4 small business CGT concessions that can help to reduce your capital gain on business assets. If you meet certain conditions, you are eligible to apply for any concessions you are entitled to – giving you the opportunity to reduce the capital gain to nil.
The four conditions are:
1. Small business 15-year exemption
If you’re a retiring business owner over the age of 55, this is a no assessable capital gain when selling a business asset that has been owned for 15 years. The concession also applies to anyone who is permanently incapacitated. This usually gives the best outcome as you may pay zero tax on any gain if you meet the requirements.
2. Small business 50% active asset reduction
This enables you to reduce your capital gain on a business (active) asset by 50%. Note this is separate to what is known as the CGT discount.
3. Small business retirement exemption
Any capital gain from selling a business asset will be exempt – with a lifetime limit of up to $500 000. If you are under the age of 55, expect to pay the exempt amount into either a complying superannuation fund or a retirement savings account.
4. Small business roll-over
Under this method, which allows you to defer a capital gain on a small business asset, you don’t include the gain in your income until a change in circumstances triggers a CGT event that then brings the deferred gain into a subsequent taxable event. This includes if you don’t buy a replacement asset within the required time, or you sell the replacement asset. Note again this is really just a deferral – still need to deal with any gain on the replacement asset.
For more advice about the way capital gain tax concession can affect your business, including death and small business CGT tax concessions, talk to one of our experienced Nexia team members today.