Small Business Capital Gains Tax Concessions
What are Small Business Capital Gains Tax Concessions?
If you are running a business that has an aggregated turnover of less than $2 million, you will likely pass the CGT small business entity test and therefore be eligible for favorable CGT concessions.
Small business capital gains tax concessions allow you to reduce, disregard or defer some or all of a capital gains from an active asset used in a small business. Before applying for small business CGT concessions, you need to meet the basic eligibility conditions below:
- A CGT event happens in respect of a CGT asset you owned.
- The CGT event would have resulted in a capital gain if the small business concessions in Division 152 did not apply
- Your business had an aggregated turnover of less than $2 million or net assets of less than $6 million
- Your asset has been actively used in business for at least half of the period owned (active asset test)
There are four types of CGT concessions
Small business 50% active asset reduction
All small businesses who satisfy the basic eligibility conditions listed previously can reduce their capital gains on the sale of active business assets by 50%.
Small business 15-year exemption
Your capital gains from the disposal of an asset can be exempted from CGT if:
- You meet the basic eligibility conditions
- You or the significant individual (if you are a company or trust) is 55 years or older and the CGT event happened in connection with your retirement
- You owned the asset for a 15-year period
Small business retirement exemption
The small business retirement exemption enables the exclusion of capital gains, up to $500,000, derived from the sale of an active asset. You do not need to cease business operations or terminate employment arrangements in order to apply for the CGT Retirement Exemption.
If you’re under the age of 55, the CGT exempt amount from the proceeds on disposal of the asset must be paid into a complying superannuation fund or a retirement savings account.
Small business roll-over
Small business roll-over allows you to defer all or part of a capital gain made from selling an active asset.
To qualify for the small business roll-over, you need to initially meet the basic eligibility conditions. After meeting these conditions, if you acquire a replacement asset or invest in capital improvements for an existing asset within a 2 year period from the sale of the original asset, any gains from the original sale will be postponed until you eventually sell the new or improved asset.
If you choose the roll-over, the capital gains will not be included in your assessable income.
Which concession to apply?
Step 1: Do you meet the basic eligibility conditions for the small business CGT concessions?
Yes: Go to step 2.
No: You do not qualify for any of the small business CGT concessions. You may be eligible for the CGT discount.
Step 2: Do you qualify for the small business 15-year exemption?
Yes: Disregard the entire capital gain. You do not need to apply any of the other small business CGT concessions.
No: Go to step 3.
Step 3: Offset any capital losses against the capital gain
If you have more than one capital gain, you can choose the order in which your capital gains are reduced by your capital losses.
Step 4: If you are eligible for the CGT discount, reduce the remaining capital gain
Step 5: Apply the small business 50% active asset reduction to reduce the remaining capital gain
You can choose not to apply the reduction and go straight to the small business retirement exemption or small business roll-over at step 6.
Step 6: If you qualify for the small business retirement exemption or small business roll-over, reduce the remaining capital gain
The amount remaining is the net capital gain to include in your assessable income for the year.
How much tax can be saved by applying small business CGT concession?
Example 1: Small business 50% active asset reduction
Ken is a small business operator who disposed of an active asset that he has owned for more than 12 months.
He makes a capital gain of $20,000. Ken also has a separate capital loss of $4,000.
He meets all the conditions for the small business 50% active asset reduction and the CGT discount.
Ken calculates his net capital gain as follows:
$20,000 (capital gain)
− $4,000 (capital loss)
= $16,000 (net capital gain)
× 50% (applying the CGT discount*) *An asset owned for at least 12 months is eligible for a 50% CGT discount.
= $8,000 (net capital gain)
× 50% (applying the small business active asset reduction)
= $4,000 (reduced capital gain)
Ken may be able to further reduce his $4,000 (already reduced) capital gains by using the small business retirement exemption and small business roll-over if he meets the conditions for those concessions. If eligible, he can keep applying the other small business CGT concessions to reduce his capital gain to zero.
Example 2: Small business 15-year exemption
On 1 December 2002, Janet purchased a 40% interest in a 400-hectare parcel of grazing land.
On 1 December 2007, she purchased the remaining 60% interest in the land.
On 15 December 2020 (Janet's 60th birthday), she sold the land and retired.
Janet owned the:
40% interest she purchased in 2002 for at least 15 years
60% interest she purchased in 2007 for just over 13 years.
The 2 interests are separate CGT assets and, accordingly, the capital gain made on the sale of the 60% interest is not eligible for the 15-year exemption. It may be eligible for other CGT concessions.
Janet would pay no capital gains tax on the exempt 60% interest.
Janet could apply the 50% discount along with a combination of small business CGT concessions including the active asset 50% reduction, retirement exemption or small business rollover to minimise or extinguish the capital gain on the 40% share.
For more information about small business CGT concessions, refer to ATO- CGT concessions eligibility
CTK Accounting is a full-scope accounting firm based in Wollongong, servicing clients nationally.For advice on Tax, BAS, GST, Bookkeeping, and Payroll issues visit us at ctkaccounting.com.au