Small business CGT concessions
Recently the ATO has found that some larger and wealthier businesses have mistakenly claimed the small business capital gains tax (CGT) concessions when they weren’t entitled to claim them.
By incorrectly claiming the concessions, these businesses were able to either reduce or completely eliminate their taxable capital gain. But because the claims were mistaken, tax will need to be paid.
The ATO is encouraging all taxpayers that have applied the small business CGT concessions to check that they were eligible and they have claimed the concessions correctly. The rules regarding the concessions are complex so care needs to be taken and appropriate professional advice should be obtained.
Eligibility for the small business CGT concessions
If you’re a small business owner and the pandemic has made you reassess your future, whether it be retirement or selling your business and starting afresh somewhere else, just remember that there may be CGT consequences to such a move.
However, the tax law does provide four concessions to enable eligible individuals and small businesses to eliminate or at least reduce the taxable capital gain on the sale of a CGT asset provided certain conditions are met.
To be eligible to apply these CGT concessions, the business must have a maximum net asset value of less than $6 million (i.e. the net value of assets owned by the business and related entities), or failing that, the business must qualify as a CGT small business entity.
The definition of a CGT small business entity is essentially the same as a small business entity except that the aggregated turnover (including the turnover of related entities) threshold to qualify is $2 million and not $10 million.
In addition, the CGT asset that gives rise to the gain must be an active asset, which essentially means it is an asset used in carrying on a business by either you or a related entity. There are some exclusions.
Selling shares in your company or units in your unit trust?
If you are selling shares in your company or units in a unit trust, these can also potentially qualify as active assets and therefore be eligible to obtain the benefit of the CGT concessions on any capital gain arising from the sale.
However, there are additional complex conditions that need to be satisfied in order to apply the CGT concessions to any capital gain arising on the disposal of shares or units.
What are the small business CGT concessions?
If the basic conditions are satisfied, you or your small business entity can choose to apply one or more of the four small business CGT concessions provided the additional conditions relevant to each concession are also met.
Meeting all the conditions means that the concessions can potentially be applied one after another to completely eliminate the entire capital gain in some cases. The small business CGT concessions are:
- Small business 15 year exemption – you (or your entity) may be entitled to a total exemption on a capital gain if the asset has been continuously owned for at least 15 years up to the time of the disposal (the CGT event). In cases where the CGT asset is a share or trust interest, the company or trust must have a “significant individual” for at least 15 years. For individuals (i.e. sole trader businesses), there is an additional condition that they must be at least 55 years of age and the CGT event occurs in connection with retirement or permanent incapacity.
- Small business 50% reduction – the business will be entitled to an automatic 50% reduction in the amount of the taxable capital gain if the basic conditions are satisfied. The CGT asset does not have to be owned for more than 12 months (if it was, there is also a general 50% CGT discount available for individuals and trusts).
- Small business retirement exemption – a business that is an individual, company or trust, may be able to choose to disregard all or part of a capital gain made from a CGT event, up to a lifetime limit of $500,000. Note, there is no age limit on using this concession, nor is there any requirement to retire, even though it is called the retirement exemption. However, individuals under 55 who seek to apply this concession must rollover the exempt CGT amount to a complying superannuation fund.
- Small business roll-over – a business can choose to roll-over all or part of the capital gain and then acquire a replacement asset if the basic conditions are met. In the event a replacement asset is not acquired within 2 years, the rolled over capital gain will be reinstated and taxed at that point.
The 15 year exemption takes precedence over the other concessions listed above and is applied without first having to use prior year capital losses.
If the 15 year exemption cannot be applied, then depending on the circumstances, the other concessions can be used in any order to reduce the taxable amount of the capital gain and therefore, the tax payable.
What attracts the ATO's attention?
The tax rules for accessing the concessions are complex and professional advice should be obtained before seeking to apply the concessions. If you get it wrong, you could face ATO attention and potentially heavy penalties.
These are some of the potential risk areas that may attract the ATO’s attention:
- entities that fail the small business entity test (for example, fail to carry on a business or have an aggregated turnover greater than $2 million)
- entities that fail the maximum net asset value test – net assets of the entity, connected entities and affiliates exceed $6 million
- the CGT asset disposed of is not an active asset
- not meeting the additional conditions where the CGT asset is a share or trust interest
- failing to correctly identify significant individuals and CGT concession stakeholders
- entities that restructure for the primary purpose of enabling access to small business CGT concessions which might not otherwise be available
- entities that claim the small business rollover, but do not report a CGT event (J5) at the end of the 2 year replacement asset period when they fail to acquire a replacement asset
- entities that do not meet the additional specific conditions relevant to the particular type of small business CGT concession being claimed (e.g. exceeding the small business CGT retirement exemption limit of $500,000)
If you run a small business and are thinking of retirement or selling the business, we can help you to work out whether you qualify for these generous tax concessions, and if you do, how best to use them to reduce or completely eliminate your capital gains tax.
Contact us today for expert help and advice.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.