You have probably heard of the CGT Small Business Concessions (SBC), but do you know what steps to take to access them with the guidance of a tax advisor? The legislation governing the SBC is highly stringent and necessitates thorough planning before selling your business. This planning is crucial to ensure you can take advantage of these provisions’ substantial tax savings.
Moreover, considering the current scrutiny of all CGT SBC claims by the ATO upon lodging your tax return, it becomes imperative for you to diligently satisfy all the necessary conditions to access these concessions. Without proper planning and the assistance of a tax advisor, the likelihood of making an error that prevents access to these concessions is significantly increased.
The following are the conditions that you need to satisfy:
- The business must be small. The taxpayer, and connected entities, need to turn over less than $2M, or the combined assets of the taxpayer and certain related entities need to be less than $6M.
- The asset being sold must have been an active asset. That is, it is a business or was used in a business. An affiliated business’s commercial property can satisfy this condition if structured correctly. Shares in a company or units in a trust can satisfy this condition as long as 80% of the underlying assets in the company or trust have been active assets for at least half of their life. This area, in particular, is very complex, and it is easy to get tripped up here. For example, excess cash in the business and loans to the shareholders are not seen as active, so if they account for more than 20% of the entity’s assets, you may fail this test.
- For a company or Trust, there must be a Significant Individual (SI) – this means that someone must own 20% or more of the entity holding the business for the SBC to be accessible.
If you satisfy these tests, then you have the ability to utilise the SBC, and they are as follows;
- 50% Active Asset (AA) Exemption – allows you to claim a 50% discount on the capital gain, so you only pay tax on half the capital gain. Please note, if you have already claimed the 50% General Discount for just holding the asset for more than 12 months (this concession is separate from the SBC and is available to all Australian resident entities except companies), then this AA discount is available on top of this, thus bringing the capital gain down to 25% of the total (it is halved and then halved again!).
- Small Business Retirement Exemption – allows CGT Concessional Stakeholders (the Significant Individual and possibly their spouse) to exempt up to $500k of the capital gain each. If you are under 55 when the gain is made, the $500k must go into superannuation. If you are 55 or over, you can put the amount into superannuation.
- Small Business 15-Year Exemption is available where the CGT asset has been held for a continuous period of 15 years in the same entity. Additionally, when the gain is made, the relevant individual is 55 years of age, and the disposal of the asset is connected with the individual’s retirement or permanent incapacity. If the asset sold is a share in a company or a unit in a trust, there must have been a Significant Individual in each year of the ownership period.
- Small Business Rollover Concession allows the taxpayer to roll over a capital gain made into a replacement active asset and acquired in the same name as the person who made the capital gain. This acquisition must be made within 2 years of the original capital gain; otherwise, the gain then crystallises into a new capital gain at the expiration of the 2 years.
These generous concessions can allow you to bring significant capital gains down to nil. They are not mutually exclusive. This means you can access multiple concessions if you satisfy the conditions. They are, however, very complex and do require proper planning. With this planning (at least 18 months before a planned business sale), you can save millions of dollars in CGT.
Don’t leave it too late. Look at your business and structure now to determine whether you need to make adjustments before selling your business. The potential saving is in the millions of dollars!
Kreston Stanley Williamson Team
*Correct as of December 2016
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.