Small business CGT concessions

Sally Preston

Selling a business can be a big decision and one that many business owners will contemplate at one time or another. This may be a sale to a key employee, a family member or even a third-party buyer.

Let’s all agree on one thing, there is not a single person, business owner or even multinational corporation in the world that wants to pay more tax than is necessary - not annually and certainly not when they sell one of their key assets.

This is where the small business capital gains tax (“CGT”) concessions come in. Unfortunately, whilst these concessions allow eligible taxpayers to reduce the tax on the sale of a business asset, they are some of the most complex rules written into the Australian tax laws. In my experience, your day-to-day accountant may choose to seek expert advice from acknowleged experts in this area. I have helped many accountants navigate and advise clients on these rules due to this complexity.

What makes the rules so complex?

Let’s list some of the reasons:

·       The thresholds – these require that the entity that owns the asset has an aggregated annual “turnover” of less than $2m or aggregated “maximum net asset value” of $6m.

·       Aggregation – who is included in this aggregation? This requires an assessment of which other people and entities are “affiliates” or “connected” with the taxpayer.

·       “Turnover”– what income is or is not included and what year(s) are tested?

·       “Maximum net asset value”– what assets are included and what are not?

·       Active asset requirement – is the asset itself an active asset - being one that is used in business by you, an affiliate or connected entity? Is there a time frame that it needs to be active for?

·       Different structures – where instead you are selling an interest in a partnership, trust or company these rules change and layers of complexity are added.

·       Sale of multiple assets - where a business as a whole is being sold i.e. trading stock, goodwill, depreciating assets, each asset must be considered against the different tax rules that apply.

What does it mean if the small business CGT concessions can be applied to the sale?

If you have held the asset for long enough (over 15 years) and the disposal is in connection with your retirement, you may be able to apply the 15-year exemption to disregard the gain entirely! Well worth looking at.

If this doesn’t apply, then the 50% small business reduction of the net capital gain can. If the taxpayer is also eligible to apply the general 50% CGT discount, this may mean reducing the gain to 25% of what it would have been.

You may also be eligible to apply the retirement exemption, which relates to contributing an amount into super (either actually or notionally) of up to $500,000 lifetime limit per eligible taxpayer.

So, how do you approach a potential sale?

The most important thing is to have an appropriately experienced tax practitioner undertake an assessment of the core rules. There may be different sale scenarios to consider - with certain scenarios allowing the rules to be applied and others not. This should be ideally done before a term sheet is signed. A buyer may not be so keen to consider alternatives after they have agreed in principle to the sale structure.

If this situation applies to you, please do not hesitate to reach out to me for any assistance. In future articles, I will look at some case studies and some of these complexities in the near future to help you further.