How to qualify for the small business capital gains tax concessions
Before selling your business, it’s important that you’re aware of the conditions for accessing tax concessions for small business. These concessions are called the Small Business Concessions (SBC). With proper planning, the SBC will allow you to significantly minimise any capital gains tax (CGT) that you might pay on the sale of your business.
In this three part series, we’ll explore:
- The basic conditions for accessing SBC
- Four types of CGT concessions available for small business
- Structuring your CGT concessions to maximise your benefit
To be able to access any of these concessions there are basic conditions which must be satisfied.
Basic conditions for accessing the concessions
1. You are a Small Business
You will generally be treated as a small business entity if the sum of your group’s turnover in the year or the previous year was less than $2 million.
Even if you are above this threshold you can still be a small business if, at the time of disposal of the asset, the sum of the net asset value of your entity, of any entities and individuals connected with your entity, is less than $6 million. This is a very complex calculation as there are some assets caught while other assets are not caught within this measurement (eg your home and superannuation are not counted).
2. The Asset sold is ActiveThe CGT asset sold is an active asset if it is an asset which was used in the course of carrying on a business (including goodwill). It must have been an active asset during at least half of the period held and specifically just before the disposal of the asset. Specific rules apply for some passive assets (like commercial properties used in the business) which might still allow you access to the concessions. If you are selling shares in a company or an interest in a trust, the active asset test above will only be satisfied if 80% of the assets owned by the company or trust are active assets for at least half of the ownership period.
3. You are a Significant Individual
If the CGT asset sold is a share in a Company or interest in a Trust, there must be what is called a Significant Individual in that entity. This is an individual that holds at least 20% beneficial ownership of all share rights. This can be satisfied by tracing through interposed entities like Trusts. If the CGT asset sold is not this type of asset then this requirement is not necessary.
There are four main concessions available which we will discuss in part two of this series.
The only way to be sure of accessing the SBC is to plan ahead. If you plan to sell your business in the next 5 years you should be looking at your structure, business affairs and asset levels with the help of your accountant now. There are legitimate planning strategies that can be put in place to enable you to access the concessions but you must plan ahead.
Questions on small business income tax and other issues can be emailed to firstname.lastname@example.org.
By Preston Foster, Senior Financial Planner, APT Wealth and Michael Goodrick, Managing Partner, Stanley & Williamson