Do I qualify for the small business CGT concessions and will they reduce my tax bill when I sell my business?
What are the small business CGT concessions?
The small business CGT concessions are a great tool for business owners to transfer wealth into superannuation. Here, we break down the two essential requirements you must first meet in order to access any of the concessions. Could your business qualify? It may be time to seek professional tax advice to start planning your business retirement strategy.
Have you considered the powerful tax and superannuation planning opportunities that the small business CGT concessions can offer your business? These concessions allow you to reduce, or in some cases, eliminate, the capital gain from the sale of a business asset, whether it’s held directly by your business entity or in another related structure.
What’s more, the concessions also allow you to make extra super contributions – sometimes up to $1,515,000 – in connection with the sale of business assets. This is an attractive opportunity for many small business owners heading for retirement, especially given the restrictive annual contribution caps that usually apply.
Basic conditions for eligibility to the small business CGT concessions
There are various concessions available, each with their own eligibility rules.
However, there are two basic conditions you must meet before you can access any of the concessions. First you must be a “small business” and second, you must be selling an “active” asset.
Let’s look at each of these rules.
1. Small Business
The first requirement tests whether your business is “small” enough to qualify. There are two alternative tests: a turnover test and a net assets test.
The turnover test is met where you carry on a business and have annual “aggregated turnover” under $2 million.
This includes not just your business turnover, but also the business turnover of any entities that are “connected” or “affiliated” with you, which broadly means related entities that you control or influence. So, if you have another trust or company that carries on a separate business, its turnover will often be considered in determining whether you meet the turnover test.
In terms of timing, you’ll satisfy the turnover test if your aggregated turnover last income year was under $2 million. Alternatively, it’s also satisfied if your aggregated turnover this year is likely to be under $2 million, provided it was not $2 million or more in the previous two years.
What if you, the asset owner, don’t carry on a business but passively hold the asset and it’s used by another of your entities in its business? You can still qualify, if the entity is sufficiently related to you and it passes the turnover test itself.
Net assets test
The other alternative test is the net assets test. You meet this test if the combined net assets of you and certain assets of your “connected” and “affiliated” (i.e. related) entities is no more than $6 million in total. Being a “net” assets test, you can subtract the liabilities related to the assets. You can also ignore assets like your main residence (provided it’s not used to produce income), personal use assets, superannuation entitlements and shares or units in your related entities.
2. Active asset
The second condition to access the small business CGT concessions is that the capital gain must arise from the sale (or another CGT event) of an “active” asset.
This means the asset must have been used or held in a business carried on by you or one of your “connected” or “affiliated” entities for the following time periods:
● if you owned the asset for 15 years or less – for at least half the ownership period; or
● if you owned the asset for more than 15 years – for at least 7.5 years.
What about property you hold in another structure and lease to your business? Property can be tricky because of a rule that specifically excludes assets where the asset owner’s main use is to derive rent or other passive income. However, where the property is used by your “connected” or “affiliated” entity in its business, it will generally qualify as an active asset.
Selling the shares in your company?
If you’re planning to sell shares in a company (or interests in a trust), you’ll need to get professional tax advice about the special rules that apply to these types of assets.
Am I eligible for Small Business CGT concessions?
The small business concessions can provide significant tax and superannuation benefits if implemented correctly. However, the rules are extremely complex.
If you are eligible for CGT concessions it can save you lots of tax dollars when you are selling your business.
Contact Mathews Tax Lawyers to find out whether you can access the small business CGT concessions when you sell your business.
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.