Small business capital gains concessions - the ultimate guide

22 Nov

If you’re a small business owner in Australia, you know that selling business assets can be a significant source of income.

But it may trigger CGT events that can eat into your profits and make it challenging to realise the full value of your assets.

And this is where small business CGT concessions come in.

These concessions are designed to help eligible small business owners reduce or disregard CGT on the sale of certain business assets.

Whether you’re retiring, selling a business asset, or transferring ownership, small business CGT concessions can be a valuable tool for maximising your profits and securing your financial future.

In a snapshot, small business CGT concessions can provide a significant boost to your financial well-being to achieve your goals and build successful enterprises.

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What are Small business CGT concessions?

In Australia, the Small Business Capital Gains Tax (CGT) concessions are tax relief measures that aim to assist small business owners in reducing the amount of tax they pay on capital gains made from the sale of their business or active business assets.

Why are CGT small business concessions important?

Small business CGT concessions are important because they can significantly reduce the amount of tax you need to pay when you sell your business or business assets. These concessions help you to retain more of the proceeds from the sale of assets, which can then be reinvested in the business or used to fund your retirement.

Let’s dive in a little deeper at some of the specific reasons why small business CGT

Concessions are important:

Tax savings:

The concessions can provide significant tax savings, which can be particularly valuable for small business owners who may not have a large amount of financial resources.

The savings can be used to help the business grow, pay off debts, or support the owner’s retirement.

Retirement planning:

For small business owners who are approaching retirement, the concessions can be particularly important to add money into their super fund.

In some circumstances, they can help to provide a completely tax free income when you retire, which can help to ensure a comfortable retirement.

Now who doesn’t want that?

Business succession planning:

The CGT concessions can also be important for business succession planning. By reducing the amount of tax payable on the sale of a business or business assets, the concessions can help to make the transfer of ownership to the next generation or a new owner more affordable and attractive.

So, start planning your succession now!

Business growth:

By reducing the amount of tax payable on capital gains, the CGT concessions can also help to free up funds that can be reinvested in a business.

Extra funds can boost your business growth and expansion, which can lead to increased profitability and a stronger position in the market.

As you can see this is an important tool for you as a business owner. Let’s see if your business meets the basic eligibility conditions.

Who is eligible for small business CGT concessions?

To be eligible for the small business CGT discount, your business must meet certain eligibility requirements, including:

The business must be considered a small business entity, which means it has an aggregated turnover of less than $2 million per annum.
The asset being sold must have been used in the business for at least half of the ownership period, or alternatively, it must be an active asset, such as machinery or equipment used in the business.
The seller must be either an individual, partnership, trust, or a company that is a small business entity.

What are the four small business CGT concessions?

Now you know you’re eligible, let’s find the small business CGT concession that is right for your circumstances.

Don’t fret, we won’t get too technical – we’ve added some examples, to make it super easy to understand.

The four CGT concessions are –

1. Small business 15-year exemption

If the business owner has owned the asset for at least 15 years and is over 55 years old and retiring, they may be eligible for a complete exemption from CGT.

Let’s say that Bob owns a small business, which he has operated for the past 16 years. Bob decides to sell his business for $2 million, triggering a CGT event. Through this transaction, Bob will make a capital gain of $1.5 million. Under the Small Business 15-year exemption, Bob may be able to disregard the entire $1.5 million capital gain, as he has held the business asset for more than 15 years.

In this case, Bob would not be required to pay CGT on the sale of his business as he has held the business for more than 15 years and he is over the age of 55.

This exemption can be particularly valuable for small business owners who have held their business for a long time and have seen it grow and increase in value over the years.

2. Small business 50% active asset reduction

Business owners may be eligible for a 50% reduction in CGT if the sold asset satisfies it is an active asset and has been owned for at least 12 months.

OK, we have Sarah here and she owns a small manufacturing business. Sarah decides to sell one of the factory buildings used in the business, creating an CGT event. The building was purchased for $600,000 and is now worth $1 million, resulting in a capital gain of $400,000.

Under the Small Business 50% active asset reduction, Sarah may be able to reduce the capital gain by a further 50% in addition to the CGT discount. This means that instead of paying tax on the full $400,000 capital gain, Sarah would only need to pay tax on half of it, which means she will pay tax on $100,000.

If Sarah is eligible for the small business CGT concessions, she may also be able to further reduce the capital gain using other concessions, such as the 15-year exemption or the retirement exemption.

3. Small business retirement exemption

If the business owner is retiring, they may be eligible for a retirement exemption of a lifetime limit of 500,000 for individuals and $1 million for couples.

Our friend, John has continuously owned his small business for 30 years and decides to retire. He sells the business for $2 million, which results in a capital gain of $1.5 million.

Under the Small Business Retirement Exemption, John may be able to disregard his lifetime limit of 500,000 of the remaining capital gain, provided he meets the eligibility criteria. In this case, John would only be taxed on the remaining $1 million of the capital gain.

John can add the funds from this exemption to contribute to his retirement savings account of a complying superannuation fund without affecting his non-concessional contributions limit and is completely tax free.

If John is eligible for other CGT concessions, such as the 15-year exemption or the Small Business 50% active asset reduction, he may also be able to further reduce the capital gain.

4. Small business rollover

Business owners may be able to defer paying CGT if they use the proceeds from the sale to purchase a replacement asset for the business.

Let’s say that Tom owns a business and decides to sell one of his business assets, a truck used for deliveries. The truck was purchased for $50,000 and is now worth $60,000, resulting in a capital gain of $10,000.

This transaction is a CGT event. So, instead of paying tax on the capital gain, Tom can choose to defer the tax by rolling over the capital gain into a replacement asset. Tom decides to purchase a new truck for $70,000 and uses the proceeds from the sale of the old truck to fund the purchase.

So, under the Small Business Rollover, Tom may be able to defer the $10,000 capital gain and instead reduce the cost base of the new truck by $10,000. This means that Tom would only need to pay tax on any capital gain when he sells the new truck (the replacement asset) in the future.

It’s important to note that you must meet all the eligibility criteria for all the small business CGT concessions, even when combining more than one. We highly recommend you seek professional advice to determine their eligibility for this exemption and other small business CGT concessions.

What is the small business CGT concession limit?

The small business CGT concession limit refers to the maximum amount of capital gains that can be reduced or disregarded under the small business CGT concessions.
As of the 2022-23 financial year, the small business CGT concession limit is $1.6 million.

Check the ATO website for these limits.

This means that eligible small business owners can reduce or disregard up to $1.7 million of capital gains from the sale of business assets, subject to meeting certain eligibility criteria and satisfying specific requirements for each concession.

Small business CGT concession limits can change from year to year, so small business owners should check with their accountant or professional advisor to confirm the current limit and their eligibility for the concessions.

What’s Books360’s scoop on small business CGT concessions?

So glad you asked – we always have tips to help you achieve more!

Get professional advice: It’s always a good idea to seek professional advice from a tax accountant like Books360. They can help you determine which concessions you’re eligible for, and provide advice on how to maximise your tax savings.

Plan ahead: To make the most of a CGT discount, it’s important to plan ahead. Before you trigger a CGT event, review your business structure, identify which assets are eligible for concessions, and the timing of the sale of assets to minimise your capital gains tax liability.

Keep accurate records: Keeping accurate records is essential to ensure you’re able to claim the CGT concessions you’re entitled to. Make sure you keep all relevant documentation, such as purchase and sale contracts, valuations, and receipts for expenses for the income year.

Know the rules: Familiarise yourself with the rules and basic conditions for each CGT concession you’re considering. For example, there are different tests you’ll need to meet to qualify for the small business CGT concessions, such as the active asset test and the net asset value test.

Consider your long-term goals: When deciding whether to claim CGT concessions, it’s important to consider your long-term goals for your business. While CGT concessions can provide immediate tax savings, they can also impact your future tax liabilities and the value of your business. A tax advisor can help you weigh the pros and cons of each concession in light of your long-term goals.

Don’t forget about other tax concessions: CGT concessions are just one type of all the concessions available to small businesses. Make sure you’re also taking advantage of other concessions, such as the small business instant asset write-off, the simplified depreciation rules, and the small business income tax offset.

Small business CGT concessions can provide significant tax savings for your business when selling certain assets. With the right planning and guidance, you can time your CGT events to leverage concessions to help you grow and succeed.