Thinking of selling your business?
Small businesses have been able to access a range of taxation concessions for a number of years including, but not limited to, simplified depreciation, trading stock and GST rules. More recently the Federal Government has extended the taxation concessions available to small businesses to include a concessional corporate tax rate and a new income tax offset.
Arguably the most valuable taxation concessions available to small businesses are the Small Business Capital Gains Tax (CGT) Concessions. These concessions can eliminate, reduce and / or defer the CGT implications from the sale of assets used by small businesses and are available to all business structures including sole traders, companies and trusts.
What are the Small Business CGT Concessions?
Subject to the satisfaction of a set of basic eligibility conditions (detailed below), small businesses may be able to access one, or more than one, of the following CGT concessions:
- 15-year exemption (full exemption)
- 50% active asset reduction (50% discount)
- Retirement exemption (full or partial exemption up to a lifetime limit)
- Rollover (deferral for two years which can be extended if a replacement asset(s) is acquired)
It is important to note that concessions 1, 3 and 4 above each have additional eligibility conditions, some which are specific to company and trust structures. These additional conditions include varying age-based requirements and timeframes that can limit access to, and application of, the concessions. For example, the retirement exemption has a lifetime limit of $500,000 per individual. Further, individuals under 55 are generally required to contribute the applicable exempt amount into a complying superannuation fund (these contributions are not counted towards an individual’s non-concessional contributions cap).
The 50% general CGT discount available to individuals and trusts for CGT assets held for 12 months or more operates in conjunction with the Small Business CGT Concessions which can further reduce the taxation consequences from the sale of business assets.
What are the basic eligibility conditions?
To be eligible for the Small Business CGT Concessions, the following basic conditions must be satisfied:
- One of the following applies:
- The taxpayer is a ‘Small Business Entity’ (refer below)
- The taxpayer satisfies the Maximum Net Asset Value Test ($6 million threshold)
- The taxpayer is a partner in a partnership that is a Small Business Entity and the asset is an interest in an asset of the partnership (or alternatively is an asset owned by the taxpayer that is used in the business of the partnership) or
- The taxpayer who owns the asset does not carry on a business but the asset is used in a business carried on by a Small Business Entity that is either the taxpayer’s affiliate or an entity connected with the taxpayer and
- The asset satisfies the active asset test.
There is also an additional condition that must be satisfied if the asset is a share in a company or an interest in a trust.
What is a Small Business Entity?
A Small Business Entity is an entity that:
- Carries on a business and
- Satisfies the $2 million aggregated turnover test (includes the turnover of any connected entities and / or affiliates)
The recent 2016/17 Federal Budget incorporated a proposal to increase the Small Business Entity aggregated turnover threshold to $10 million from 1 July 2016. However the existing $2 million aggregated turnover threshold is proposed to be retained for determining eligibility to the Small Business CGT Concessions.
What to do if you are considering selling your business (or have recently sold your business)
Whilst taxation is obviously only one factor to consider when deciding if and / or when to dispose of a business, it is important to seek specialist advice from a qualified tax professional to understand the likely taxation consequences from the business sale and available CGT concessions (including the associated eligibility conditions and obligations).
Adopting some simple strategies prior to selling your business can facilitate access to CGT concessions that may be otherwise unavailable, resulting in substantial tax savings.
If you are considering selling your business, or have recently sold your business, BLG Business Advisers are here to help! Contact us online or call (02) 4229 2211 to arrange an appointment with one of our experienced tax advisers.