Updated February 2023
There is a lot to consider and manage when you are looking at selling your business or an asset from your business. The time and energy it can take to find a buyer, negotiate a price and work through the due diligence and legal processes can be considerable.
Upon settlement, your sigh of relief that it is all done and dusted may turn into a gasp if you haven’t considered the tax implications arising from the sale.
Fortunately, there are a range of concessions that are available to small businesses that can help reduce the tax you will be required to pay if you make a capital gain on your sale.
What are the 4 Small Business Capital Gains Tax Concessions?
The four Small Business CGT Concessions that can be applied to reduce your assessable capital gain are:
1. 15 Year Exemption
In applying this concession you have the ability to disregard a capital gain (ie. the gain is tax free) arising from a business sale where the business has been owned for at least 15 years, you are aged 55 or older and the sale is in connection with the taxpayer’s retirement.
2. 50% Active Asset Reduction
This concession allows you to treat 50% of the capital gain as tax free, meaning you are only taxed on the remaining 50% of the gain realised.
3. Retirement Exemption
Under this concession you can disregard a capital gain you make on the sale of your business up to a lifetime limit of $500,000. If you are under the age of 55 at the time you must contribute to a complying superannuation fund the amount of the gain you wish to disregard and treat as tax free. If you are over the age of 55 you do not need to contribute the funds to super and instead can take it as a tax free ETP payment.
4. Replacement Asset Roll-Over
Upon selling one business you may consider buying another. When this is the case, you can choose to defer the capital gain made on your initial business sale by attaching it to a new active asset purchase. In doing so, the capital gain and any tax liability associated with the gain will sit on hold until you sell the replacement asset.
What are the eligibility criteria for these Capital Gains Tax Concessions?
In order to apply one or more of the small business CGT concessions there are a number of ‘basic’ eligibility criteria you must meet. We use the term ‘basic’ quite lightly in this instance as whilst they seem quite straight forward, the devil is in the detail.
In summary, the basic eligibility criteria are:
- Small Business Entity Test – the taxpayer must carry on a business and have an aggregated turnover of less than $2 million or;
- Net Asset Value Test – the taxpayer and all connected entities and associates must have an aggregated net asset value of less than $6 million, and;
- Active Asset Test – the asset you are selling must be used in your business or a business connected with you (eg. A business premises you operate your business from or Goodwill associated with your business). It is possible to sell an equity interest and treat it as an active asset, however, there are further conditions that must be met to satisfy the equity’s active asset status.
- Tests subject to concessions chosen – it should be noted that there are also further criteria that must be met depending on the concessions that you may choose to apply.
The use of these concessions can result in significant taxation savings and in some cases, achieve a tax free sale for the business owner. On the flip side, if applied incorrectly they can also trigger costly mistakes.
The sale of your business will be one of the most important transactions you make so why not take the time to plan it to maximise the outcome you can achieve with the right steps and advice.
This article was updated by Kylie McEwan, a Tax and Business Services Director and Taxation Consultant. Kylie specialises in the use and application of the Small Business CGT Concessions and can provide you with expert advice. To make an appointment or speak to Kylie, please call our office on 5221 6399 or email Kylie at firstname.lastname@example.org.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.
This article was written by Director Kylie McEwan.