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In many situations this is entirely possible.
When small business owners dispose of active business assets, they may be entitled to disregard some or all of the capital gain by utilising the available Capital Gains Tax (CGT) concessions.
The CGT calculation is the last step of the business sale transaction. Don’t forget to seek advice in the lead up to selling your business and make sure you properly set the business up for sale. You need to understand your trading entity and what you are actually selling and the different tax implications on such items as stock, plant and goodwill.
Firstly, a small business owner will have to determine eligibility of the small business CGT concessions by meeting one only of the following two available conditions:
- Turnover is less than $2m OR
- Net assets are less than $6m. The net value of the CGT assets of the taxpayer and its connected entities and affiliates is less than $6m (excluding superannuation and the family home)
The asset you are disposing of, such as the goodwill, is an active asset. An asset is active if it is used or held ready for use in the course of carrying on a business such as goodwill.
Once a business owner meets the eligibility criteria there are four available concessions:
- 15 Year Exemption (CGT cap)
- Individual taxpayer is over 55 and the sale is in connection with retirement (or permanently incapacitated), the gain is disregarded
- Small business lifetime CGT cap $1,415,000 for 2016/17
- 50% Active Asset Reduction
- The capital gain can be reduced by 50%
- CGT Retirement Exemption
- You can disregard capital gain if it is used to fund your retirement up to a lifetime limit of $500,000 per person
- If you are under 55, then the proceeds must be contributed to super
- If 55 and over then it is tax free in your hands
- CGT Rollover Exemption
- You can elect to defer the capital gain for up to two years by which time you must have:
- acquired a replacement active asset to at least the value of the deferred gain
- pay tax on the deferred gain
- You can elect to defer the capital gain for up to two years by which time you must have:
Examples
Retirement Exemption ($500k cap)
Fred sells a small business for a capital gain of $500,000 after age 55:
- the sale can be entirely TAX FREE
Donna who is only 50 sells her business for a capital gain of $200,000 and contributes the gain on sale to her super fund:
- the sale can be entirely TAX FREE
Peter who is 54 sells his business for a capital gain of $130,000 and doesn’t want to put the gain into super, he applies the CGT Rollover Exemption for two years until he is 56 and:
- the sale can be entirely TAX FREE
Combination of Concessions
One of the best parts of the concessions is that you can apply multiply concessions to achieve the best result.
Jenny is 54 and sold her business which she operated for 12 years and made a capital gain of $1,200,000.
Step 1 - apply the 50% general discount (available to most individuals and business other than companies):
- reduces the capital gain to $600,000
Step 2 - apply the active asset 50% discount:
- reduces the capital gain to $300,000
Step 3 - apply the CGT Rollover Exemption for two years:
- $300,000 capital gain deferred
Step 4 - Jenny is now 56 and can apply the CGT Retirement Exemption:
- capital gain and tax $0 and she can put the cash in her back pocket
As demonstrated in the above examples, with the right advice and planning it is possible to significantly minimise tax consequences on the sale of your business.
Have a question about CGT?
Contact our tax experts or your local RSM office today!
