Understanding small business CGT concessions

If you’re a small business owner and own business assets, chances are you know what Capital Gains Tax (CGT) is and when it’s applied. But did you also know small business owners may qualify for a number of CGT concessions when they sell a business asset? And these CGT concessions can save you lots of money at tax time. 

So, if you have an asset that’s increased in value since you bought it, and you’re thinking of selling, it’s a good idea to understand small business CGT concessions before making the final decision to sell.

What is Capital Gains Tax (CGT)? 

Introduced in September, 1985, any asset you’ve acquired since then is subject to CGT, unless otherwise exempt. When you sell or dispose of any asset, the difference between what you paid for it and the amount you sell it for is called a capital gain. If you sell your asset for a loss, it’s then called a capital loss. 

When it comes to CGT and small business, the Australian Taxation Office (ATO) advises:

‘’CGT affects businesses when certain events happen, such as selling commercial premises or a business.

You can disregard or defer some or all of a capital gain from an active asset with the small business CGT concessions.

Depreciating assets, such as business equipment, are generally exempt from CGT unless you use them for a private or other non-taxable purpose.

• You can find out more about CGT, including:
• what is CGT
• which assets are subject to or exempt from CGT
• what happens when you dispose of an asset
• how to calculate your CGT.’

Small business GCT concessions

The small business CGT concessions let you reduce, disregard or defer some or all of the CGT from an asset used in your small business. The concessions become available when you sell the asset and meet eligibility requirements. 

CGT eligibility requirements

The ATO advises the basic eligibility steps you need to meet.

First of all, you need to be one of the following: 

• a small business entity with an aggregated turnover of less than $2 million

• not carrying on a business (other than as a partner) but your asset is used in a closely connected small business (passively-held assets)

• a partner in a partnership that is a small business entity, and the asset is either

• an interest in a partnership asset (partnership assets)

• an asset you own that is not an interest in a partnership asset (partner's assets) but is used in the business of the partnership 

• you satisfy the maximum net asset value test.

The asset then needs to satisfy the active asset test and, if it’s a share in a company of interest in a trust, it needs to meet some additional conditions.

There are also some additional conditions if the CGT event happened after 7.30pm AEDT on 8 May 2018. Which you can read about in step 4 on the ATO website page.

What's a CGT event?

The ATO defines a CGT event as the time you sell an asset that’s subject to CGT, because that is when you make a capital gain or loss on the asset. Other CGT events include the loss or destruction of an asset, or the creation of contractual or other rights.

The type of CGT event that applies to your situation may affect:

• the time when the CGT event happens

• how to calculate your capital gain or loss.

The four CGT concessions for which you may qualify

There’s four small business CGT concessions that apply to CGT events:

• 15 year exemption
• 50 percent asset reduction
• retirement exemption, and;
• rollover

15 year exemption 

You won’t pay CGT if you dispose of an asset and meet both of these requirements:

• you’re aged 55 years or older and retiring or permanently incapacitated
• you’ve continuously owned the asset for at least 15 years.

You may also be able to contribute to your superannuation from the small business 15-year exemption without affecting your non-concessional contributions limits.

50 percent asset reduction 

You’ll only pay tax on 50 percent of the capital gain when you dispose of an active asset.

The small business 50 percent active asset reduction applies if you meet the basic eligibility conditions. It applies in addition to the CGT discount.

You can also opt not to apply this concession.

Small business retirement exemption 

Capital gains from the sale of active assets are exempt from CGT up to a lifetime limit of $500,000.

If you’re under 55, the exempt amount needs to be paid into a complying superannuation fund or retirement savings account.

You may be able to use the funds from the small business retirement exemption to contribute to your super without affecting your non-concessional contributions limits.

You don’t have to shut down your business at the same time. The goal of this concession is to help you fund your retirement. 

Rollover

The small business rollover lets you defer all or some of a capital gain for up to two years. 

You can rollover even longer if you buy a replacement asset or improve an existing one in the income year you choose the rollover.

How many CGT concessions can you claim?

You’re entitled to apply as many of the CGT concessions as are applicable until your capital gain is reduced to zero. Although, there’s rules about the order you apply the concessions, any current year or prior year capital losses and the CGT discount.

It’s easy to see these small business CGT concessions are designed to help boost your super or retirement savings.

If you’re in any doubt as to how you should apply these concessions, or when is the best time to sell active small business assets, contact us to schedule an appointment.