Do I qualify for Small Business Capital Gains Tax Concessions?

Posted by James Price | JPAbusiness on 15-Jan-2020 02:00:00

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Small Business Capital Gains Tax (CGT) Concessions can provide generous and attractive concessions for small business, and the structure of your sale transaction may impact whether or not you qualify for the concessions.

However, you must obtain advice from a CGT specialist to ensure the structure you choose is not deemed to be tax avoidance. Remember, tax minimisation is legal – tax avoidance is not.

The following blog is an excerpt from our updated CGT eBook, Capital Gains Tax 2.0 – Issues to consider when selling your business.

How do I qualify for Small Business CGT Concessions?

In regards to selling a business, the Small Business CGT Concessions are available when there is a disposal of an active asset* and any of the following are satisfied:

  • The business being sold has an aggregated annual turnover of less than $2 million.
  • You own net assets of no more than $6 million.
  • You don't 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.
  • If you are a partner in a partnership that is a small business entity, and the CGT asset is an interest in a partnership asset or as asset you own that is not an interest in a partnership asset but is used in the business of the partnership.

These tests look at not only the turnover/assets of the business in question, but also the turnover/assets of affiliate and connected entities.

*An active asset means the asset must be active for at least 7.5 years if owned for more than 15 years, and half of the period of ownership if owned for 15 years or less. The asset can be a tangible or intangible asset. 

What are affiliate and connected entities?

Affiliate entities: An affiliate is any individual or company that, in relation to their own business affairs, acts in accordance with your directions or wishes, or in concert with you. In most circumstances the business assets held by your spouse and children (under 18 years) are considered an affiliate entity.

Connected entities: Exist where one entity controls the other (or vice versa), or both entities are controlled by the same third entity.

Additional conditions if the CGT asset is a share or trust interest

If the asset is an interest in a share or a trust, additional conditions must be met to qualify for Small Business CGT Concessions:

  • If an individual holds the interests in a company or trust that are to be sold, the individual taxpayer or his/her spouse must be a CGT concession stakeholder (i.e. individual or spouse must hold 20% or more of the voting and distributions rights in the company or trust).
  • If a company or trust holds the interests that are sold, all CGT concession stakeholders must hold at least 90% of the interests in the company or trust selling the interests.
  • Interests in the company or trust satisfy a modified active asset test. Under the modified active asset test, a proportion of all the assets of entities in which the taxpayer owns an indirect interest (‘a later entity’) are counted in the pool of assets. However, these assets can only count as ‘active’ if both conditions are satisfied as follows:
    • the taxpayer’s small business participation percentage in the later entity is greater than 20% (i.e. the 20% control test rule), or the taxpayer is a CGT concession stakeholder of the later entity; and,
    • the later entity would be a CGT small business entity or satisfy the modified maximum net asset value test (i.e. net assets no more than $6 million) using the 20% control test rule.

 

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What are the Small Business CGT Concessions?

There are four Small Business CGT Concessions which may reduce the amount of CGT payable on a business sale in a number of different ways:

  1. 15-Year Asset Exemption – You have to hold the asset for longer than 15 years and the asset must be sold in connection with someone’s retirement; as such, they must be over 55 years of age. If these criteria are met the CGT liability may be effectively reduced to nil.
  2. 50% Active Asset Reduction – When selling an active asset which is eligible for the Small Business CGT Concessions, the taxable gain is reduced by 50%. This is used in conjunction with the general CGT discount which allows the taxable amount to be reduced by 50% when the asset has been held for more than 12 months. After applying the general 50% reduction, the active asset reduction reduces the taxable amount by a further 50%. Therefore, in effect, the taxable gain is 25% of the total gain.
  3. Retirement Exemption – If you make a capital gain, you’re aged over 55 and the gain is in connection with your retirement, you may be able to receive this gain tax-free, up to a lifetime limit of $500,000. However, if you’re aged under 55 and wish to take advantage of this exemption, the amount must go into a complying super fund or a retirement savings account. Again, the lifetime limit of $500,000 applies.
  4. Rollover Exemption – This is effectively a deferral of CGT that would otherwise be payable. For example, if you sell one active small business asset and within a prescribed timeframe you purchase a subsequent active asset, you may be able to defer the CGT that would otherwise be payable until the subsequent asset is sold. The rollover exemption applies when the subsequent asset is purchased any time in the 12 months prior to the sale of the original asset, or 24 months after the sale of the original asset.

Small business restructure rollover

In addition to the four Small Business CGT Concessions, you can use the small business restructure rollover to allow the transfer of active assets from one entity to another, on or after 1 July 2016, without incurring an income tax liability. You can access this concession if your aggregated turnover is less than $10 million.

 

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Can I structure a business sale to qualify for Small Business CGT Concessions?

The structure of a sale transaction may impact whether you qualify for Small Business CGT Concessions. However, as we've said before, it is vitally important to obtain advice from a CGT specialist to ensure the structure is not deemed to be tax avoidance. Again: tax minimisation is legal – tax avoidance is not.

The following scenario outlines one example of a sale transaction structure that may qualify for Small Business CGT Concessions.

Scenario: Structuring a sale to be eligible for Small Business CGT concessions

Husband and Wife own XYZ Pty Ltd and are looking to sell the business. They receive an offer for the ordinary equity (shares) in the business of $6.5 million.

XYZ Pty Ltd currently has $1,000,000 cash in the business. Husband and Wife have $800,000 outstanding on a mortgage over their family home and own no other assets.

Should Husband and Wife accept the offer of $6.5 million they will not be eligible for Small Business CGT Concessions due to the $6 million net asset threshold.

As an alternative, they could pay themselves a dividend of $800,000 (which will be taxed at their marginal income tax rate) and use this money to service the outstanding debt on their home.

This will reduce the value of the business to $5.7 million, therefore potentially making them eligible for the Small Business CGT Concessions.

The dividend used to service the mortgage will not be part of the assets considered in the $6 million asset test as the family home is exempt from this test.

 

The information contained in this blog is general in nature and should not be taken as personal, professional or taxation advice. You ought to make your own inquiries and seek independent, professional advice before taking action or relying on any information in this blog. As Capital Gains Tax legislation is subject to change, we cannot guarantee the timeliness of the information provided.
Last updated November 2019.

 

CGT 2.0 - Issues When Selling Your Business eBook | JPAbusiness

 


James Price 2018 smallJames Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.

 

Topics: Selling your business, Advice, Tax, Capital gains tax, eBook, Business advisor, Parramatta, Orange NSW, CGT

 
Disclaimer: The information contained in this blog is general in nature and should not be taken as personal, professional advice. Readers should make their own inquiries and obtain independent, professional advice before making any decisions, taking any action or relying on any information in this blog. 
 
 

 

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