Small businesses in Australia have a few capital gains tax (CGT) exemptions and concessions available to them to eliminate, reduce or defer the capital gains on disposing of an eligible business CGT asset.
These small business CGT exemptions/concessions are:
Basic Conditions for Small Business CGT Concessions
The above 4 exemptions and concessions are available if basic conditions are met.
- You must be a small business entity, ie. an individual, partnership, company or trust that is carrying on a business, and has an aggregated turnover of less than $2 million.
- You must satisfy the maximum net asset value test. The total net value of CGT assets owned by you and certain entities does not exceed $6 million just before the CGT event for which the concessions are sought. This limit is not indexed for inflation.
- The asset in question must satisfy the active asset test, in which the asset must have been an active asset of yours for a total of at least 7½ years during the test period, if you’ve owned it for more than 15 years, or for at least half of the test period, if you’ve owned it for 15 years or less.
If your business has continuously owned an active asset for 15 years and you’re aged 55 or over and are retiring or permanently incapacitated, you won’t have an assessable capital gain when you sell the asset. This is on the assumption that the basic conditions for the small business concessions are satisfied.
Under the 15-year exemption, you can entirely disregard the capital gain and will not need to apply any other concessions. Yyou also don’t have to apply capital losses against your capital gain before applying the 15-year exemption. However, if you make a capital loss from the CGT event, you may use the capital loss to reduce other capital gains.
50% Active Asset Reduction
An active asset is an asset that you use it or hold it ready for use in the course of carrying on a business (whether alone or in partnership) or is an intangible asset (for example, goodwill) inherently connected with a business you carry on (whether alone or in partnership).
The capital gain on an active asset can be reduced by a further 50%, in addition to the 50% CGT discount if you’ve owned it for 12 months or more. This translates to a 75% reduction on the capital gains.
ie. Capital Gain: $100
50% CGT discount = 50% x $100 = $50
50% active asset reduction = 50% x ($100 – $50) = $25
Taxable capital gain = $100 – $50 – $25 = $25
CGT Rollover Relief
The small business rollover allows you to defer all or part of a capital gain made from a CGT event happening to an active asset.
To qualify for the small business rollover, you need to satisfy the basic conditions for the small business CGT concessions. You can choose to obtain a rollover even if you haven’t yet acquired a replacement asset or incurred expenditure on a capital improvement to an existing asset.
CGT Retirement Exemption
You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions.
If you’re an individual who chooses the retirement exemption, you do not need to terminate any activity or cease business. This concession allows you to provide for your retirement. If you’re a CGT concession stakeholder and receive payments under the retirement exemption, you’re not required to terminate your employment.
if you’re under 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying super fund or retirement savings account (RSA) to a lifetime limit of $500K.
Disclaimer: This blog post has been simplified to cover some key points of the small business retirement exemption. This should not be construed as advice from Glint Accountants. There are many other factors to be considered and each business situation is unique. Therefore, we encourage readers of this blog post to contact Glint Accountants for assistance with their specific circumstances.
Geraldine Lee is Fellow of CPA Australia and experienced with CGT exemptions and concessions for small business. If you’re selling your business and would like to plan ahead to reduce your CGT bill, contact us today!