Small Business CGT Concessions
This overview of small business CGT concessions will give you a rough road map of the most generous concession for small business in Australia.
Small Business CGT Concessions
Imagine the small business CGT concessions didn’t exist. Let’s say you have a small business. And your business is your life. Started from scratch 30 years ago. Risked the family home during the GFC for it. Risked everything. Gave dozens of people good steady jobs. Was part of the engine that drives Australia.
Now you get an offer to sell with a $1m capital gain. How much do you get to keep? 53% – the ATO will take the other 47%, assuming that you have other income and the capital gain fully hits the top marginal tax rate.
Doesn’t feel right. So can you see why we need the small business CGT concessions? To make sure your life’s work doesn’t evaporate in tax. If you qualify, you will pay little or no tax. It can change your life.
Do You Qualify In Principle?
The small business CGT concessions are very generous. But to qualify you have to pass three hurdles.
Hurdle # 1 Basic Conditions
The basic conditions are your first hurdle. To pass these basic conditions, you need to meet one of 4 conditions – A, B, C or D. It is an either-or proposition. If you fail one, you can still get through with another.
A – Turnover
You need to carry on a business and have a turnover of less than $2m. This is called the small business turnover test. If you don’t pass it, just keep going. Maybe you pass the net asset value test.
B – Net Asset Value
You pass the maximum net asset value test, if you have net assets of $6m or less. Your net assets include your interest in the business you sell as well as certain assets of your affiliates and connected entities. But your net assets don’t include your main residence, personal use assets and superannuation for this test.
C – Partnership
If the asset you sell is a partnership asset, then the partnership as a whole must carry on a business and meet the turnover test. If that fails, then the your proportionate share of the partnership will go into your net asset value test under B.
D – Passively Held
If the asset is passively held and used by an associate or connected entity in a small business entity, you pass.
You only need to pass one of these four. Take a capital intensive business like a farm as an example. It might hold land worth more than $6m, but have a turnover of less than $2m, and hence qualify.
Hurdle # 2 Active Asset Test
The active asset test is your second hurdle. You need to always pass this test. This means that the asset must have been part of your business. ‘Used or held ready for use’ is the term they use.
Hurdle # 3 Shares or Units
And the third hurdle only applies if shares or units are involved. If they are not, skip this one. You are done.
If your set up includes shares or units, then this turns into a different ball game. It will get a lot more complicated. How this all works is a long story that we will cover later. So for now let’s just assume that no shares or units are involved. That you are a sole trader selling your business.
Do You Qualify For a Specific Exemption?
So you qualified in principle. But what do you actually get? It depends which specific concession you qualify for.
There are 4 small business CGT concessions. Each of these four is unique with its own set of rules and requirements. Would be boring otherwise. And how you combine these four is important as well and might result in different tax outcomes.
Subdiv 152-B 15-Year Exemption
The first and most generous exemption is the 15-year exemption. It is unique in that it exempts the entire capital gain without any cap. Think about that. The entire capital gain: Tax-free.
This exemption takes priority over the other three exemptions. And it applies before any capital loss offset. So you can keep your capital losses and still get the entire capital gain tax-free.
But to pass you must have owned the asset for at least 15 years and be at least 55 years old.
And the CGT event must happen in connection with your retirement or permanent incapacitation. What is or isn’t “in connection with your retirement” is often a point of contention though.
If you qualify for the 15-year exemption, you can stop reading here. Anything that comes after this won’t affect you anymore since your entire capital gain is disregarded. This exemption has priority. If you qualify, it applies whether you like it or not. But we have never met a living soul who doesn’t like this one.
Subdiv 152-C 50% Reduction
This one is easy. The moment you pass the basic conditions, you have this one in your pocket. You don’t have to apply it but you can.
The 50% reduction allows you to reduce a capital gain by a further 50%. Why further? Because you probably already got the 50% CGT discount if you held the asset for at least 12 months.
So now in addition you get the 50% small business reduction when you pass the basic condition. And after that you can still apply the other two exemption, hopefully reducing your capital gain to zero.
Subdiv 152-D Retirement Exemption
This one is also easy even though it comes with slightly more fineprint. You can claim a capital gain of up to $500,00 as exempt. But not more – ever. That is the lifetime cap.
And there is one more catch. If you are under 55, you have to pay the exempted amount into super. Some people don’t like that. And so they skip this one or park it. The secret word is J5. Sounds confusing – I know.
Here is an example how this works out in conjunction with the 50% reduction. Let’s say the capital gain is $4m. The 50% CGT discount brings it down to $2m. The 50% reduction brings it down to $1m. And then you and your spouse claim $500,000 retirement exemption each. And voila. You walk away with $4m tax-free in your pocket. Not bad.
Subdiv 152-E Rollover
This one will buy you time. Your capital gain is not disregarded just yet, but you defer paying tax on it.
This rollover relief allows you to defer the capital gain for at least two years or beyond two years if you acquire a replacement active asset or incur capital expenditure on active assets. You can choose to rollover the entire capital gain or just a portion after the 50% reduction and retirement exemption. The decision is yours.
If you don’t acquire a replacement asset withing the 2 years, you trigger CGT event J5. But guess what? That might be exactly what you had inteded.
By now you might be 55 and no longer have to put the retirement exemption into super. So now you apply the retirement exemption and walk away with the cash tax-free.
So that was a quick small business CGT concession overview to give you a rough idea. To show you what is possible.
But don’t give up if this sounds too confusing. Just ask your accountant or ask us. My number is 0407 909 779 – just call me. I am Heide Robson.
Disclaimer: numba does not provide specific financial, legal or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax or legal advice when considering whether the information is suitable to your circumstances.
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Last Updated on 17 August 2020
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We look after the tax and accounting of your business, wealth and SMSF. We are Chartered Accountants and Registered Tax Agents in Australia and IRS-registered CPAs in the US.