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.
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.
These tests look at not only the turnover/assets of the business in question, but also the turnover/assets of affiliate and connected entities.
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.
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:
- 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.
- 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.
- 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 superannuation. Again, the lifetime limit of $500,000 applies.
- 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.
How does the structure of my business sale impact whether I qualify for Small Business CGT Concessions?
The structure of a sale transaction may impact whether you qualify for Small Business CGT Concessions. However, it is vitally important to obtain advice from a CGT specialist to ensure the structure is not deemed to be tax avoidance. Remember, 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 $6.5m.
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 $6.5m they will not be eligible for Small Business CGT Concessions due to the $6m 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 $5.7m, 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 $6m asset test as the family home is exempt from this test.
As Capital Gains Tax legislation is subject to change we cannot guarantee the timeliness of the information provided in this blog.
James 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.