Chartered Accountant Timothy Quinn leads Tax & Accounting at Lawpath. 16+ years in tax advisory, specialising in startup growth and expansion. Passionate about supporting entrepreneurial clients with early-stage investment incentives, restructuring, international exit strategy planning, and more.
Capital Gains Tax (CGT) costs can be significant when you sell or otherwise dispose of an asset. Fortunately, the Australian tax system provides several CGT concessions that help small businesses reduce their tax burden. Understanding and strategically using these concessions can help you optimise your tax claims and returns.
In this article, we will guide you through the four key CGT concessions available to small businesses in Australia. We will explore the requirements and benefits of each concession, helping you gain the knowledge you need to navigate them.
Table of Contents
What is CGT, and how much is it?
Capital Gains Tax (CGT) costs can be significant when you sell or otherwise dispose of an asset. Fortunately, the Australian tax system provides several CGT concessions that help small businesses reduce their tax burden. Understanding and strategically using these concessions can help you optimise your tax claims and returns.
In this article, we will guide you through the four key CGT concessions available to small businesses in Australia. We will explore the requirements and benefits of each concession, helping you gain the knowledge you need to navigate them.
What is CGT, and how much is it?
CGT or Capital Gains is a tax that you pay when you sell different types of assets. For a small business, this could include business premises, goodwill, or company shares. When you dispose of an asset, it triggers a CGT event. You are then required to report any capital gains or losses in the business’s income tax return.
There’s no fixed CGT rate. Instead, the net capital gain is added to the taxpayer’s assessable income and taxed at the applicable company tax rate.
The current company tax rate for small businesses (with aggregated annual turnover below $50 million) is 25%, while the top marginal tax rate for individuals is 47%, including the 2% Medicare levy.
To illustrate, if a small business purchases equipment for $50,000 and sells it six months later for $55,000, the capital gain of $5,000 would be added to the business’s taxable income for that year.
However, small businesses can access various CGT concessions that can significantly reduce their tax liability. Let’s take a closer look at these.
Eligibility criteria for small business CGT concessions
There are four key CGT concessions available to eligible small businesses in Australia:
- The 15-year exemption
- 50% active asset reduction
- Retirement exemption
- Rollover relief
To access these small business CGT concessions, your business must meet specific eligibility conditions. The basic requirements include:
- Satisfying either the small business entity test (aggregated turnover of less than $2 million) or the maximum net asset value test (net assets of $6 million or less).
- Meeting the active asset test, which requires the asset to be used in the course of carrying on a business.
- If the asset is a share in a company or an interest in a trust, additional conditions apply, such as the CGT concession stakeholder test.
For example, a small retail shop with an annual turnover of $1.5 million selling its business premises would likely meet the basic eligibility criteria for CGT concessions.
The 4 small business CGT concessions
Now, let’s look at each concession in more detail. These concessions can significantly reduce or even eliminate the CGT liability when selling business assets, providing substantial financial relief and opportunities for growth or retirement planning. Understanding these can help you save money and plan asset disposal more strategically.
1. 15-Year Exemption
The 15-year exemption allows eligible businesses to disregard the entire capital gain from the sale of an asset that they have owned for at least 15 years. This concession is designed to provide significant tax relief for long-standing business owners approaching retirement.
To qualify:
- The business must have continuously owned the asset for at least 15 years.
- The business owner must be aged 55 or older and retiring, or be permanently incapacitated.
For instance, a 60-year-old small business owner selling their factory after 20 years of ownership could potentially disregard the entire capital gain under this exemption.
This concession can be particularly beneficial if you are a business owner looking to maximise your retirement fund. This is because it allows you to retain the full value of your long-held business assets without incurring CGT liabilities.
2. 50% Active Asset Reduction
This concession allows small businesses to reduce their capital gain by 50% on active assets held for at least 12 months. An active asset refers to an asset that you use or hold ready for use while running your business. You can apply this reduction in addition to other CGT concessions, potentially leading to a significant decrease in tax liability.
For example, if a small business makes a capital gain of $100,000 on the sale of equipment used in their operations, they could potentially reduce this to $50,000 using the 50% active asset reduction. Plus, if the business owner is eligible for the general 50% CGT discount (available to individuals and trusts), the taxable gain could be further reduced to $25,000.
3. Retirement Exemption
The retirement exemption provides a lifetime CGT exemption of up to $500,000 for small business owners. This concession can be particularly useful if you are a business owner who is looking to boost your retirement savings.
- If the business owner is under 55, the exempt amount must be paid into a complying superannuation fund or retirement savings account.
- For those 55 or older, there’s no requirement to pay the amount into superannuation.
Consider a 50-year-old business owner selling their business for a $600,000 capital gain. They could potentially exempt $500,000 of this gain, provided they contribute this amount to their superannuation.
It’s important to note that despite its name, the retirement exemption doesn’t actually require the business owner to retire.
4. Rollover Relief
Rollover relief is like hitting the pause button on your tax bill when you sell a business asset. Instead of paying tax right away, you can use the profit money to buy a new asset for your business or improve an existing one. The CGT is put on hold until you sell the new or improved asset.
For instance, a business selling a property for a $200,000 capital gain and using the proceeds to purchase a new business premises could defer the CGT liability until it sell the new property.
This provides flexibility for businesses to reinvest and grow without immediate tax consequences. The deferral can last indefinitely, potentially allowing the business to continue expanding and upgrading assets while deferring CGT liabilities.
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FAQ
What is the maximum net asset value test for CGT concessions?
The maximum net asset value test requires that the net value of CGT assets owned by the business and related entities doesn’t exceed $6 million. This test is one of two ways for determining eligibility for small business CGT concessions.
Can I apply multiple CGT concessions to one asset sale?
Yes, you can apply multiple CGT concessions to a single asset sale, provided you meet the eligibility criteria for each concession. This can potentially reduce your capital gain to zero.
Do CGT concessions apply to all small businesses in Australia?
CGT concessions are available to eligible small businesses in Australia that meet specific criteria, including turnover or asset thresholds and the active asset test. Not all small businesses will automatically qualify.
Effectively using CGT concessions
Understanding and using CGT concessions can provide significant tax benefits for your small business in Australia. These concessions offer opportunities to reduce, defer, or even eliminate capital gains tax liabilities when selling business assets.
However, the rules and eligibility criteria can be complex. If you are unsure which concessions you may be eligible for, it’s best to seek professional tax advice from a company like Lawpath. We can help you navigate business tax compliance with ease.
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