Small business owners can face a large tax bill when selling their business, or an asset used in their business, at a gain. Concessions can be available to small business owners to reduce, defer, or, in some instances, completely negate any income tax payable in these circumstances.
Small business owners can face a large tax bill when selling their business, or an asset used in their business, at a gain. This might include, for example, the premises from which their business operates.
A group of concessions, collectively known as the small business CGT concessions, can be available to small business owners to reduce, defer, or, in some instances, completely negate any income tax payable in these circumstances.
There are four tax concessions potentially available under these provisions which can greatly improve the after tax profits to the business owners. These concessions can be used in isolation or, in some circumstances, in combination with each other to achieve the best result.
- Small business 15 year exemption;
- Small business 50% reduction;
- Small business retirement exemption;
- Small business roll-over relief
The concessions can be quite difficult to apply in practice, and are acknowledged as a particularly complex area of tax law in all but the most straight-forward circumstances. Nevertheless, because of the large tax savings on offer, they should be considered carefully before undertaking what can be one of the largest transactions in the life of a small business owner.
The basic conditions
To access the concessions the basic conditions must be satisfied. These broadly require the taxpayer:
- To be a small business entity (annual turnover of less than $2 million), or
- To have net assets of less than $6 million, excluding their principal place of residence, superannuation balances and other specified assets. This includes assets of certain related entities.
The concessions are also available in some circumstances to passive asset holding taxpayers, where the asset is used in a related small business. This can provide relief where, as is often the case, the business premises are held in an entity separate to that carrying on the business for risk protection reasons.
The asset disposed of must also pass the active asset test. This requires the asset is used in the business for at least half the ownership period (capped at 7 ½ years if the asset has been owned for more than 15 years). Certain assets, including some used to produce passive income for the business, cannot be active assets.
Interaction with superannuation contribution caps
Where the small business 15 year exemption or the small business retirement exemption are available in respect of a capital gain (or would be available should a capital gain have arisen on sale of a business asset), a special superannuation contribution cap, known as the lifetime CGT cap, can apply. This allows the proceeds from the sale of a business asset to be contributed to superannuation up to a lifetime cap of $1.355 million (2014/15). This is over and above an individuals’ usual concessional and non-concessional caps.
Being a complex area of taxation law, there are many possible pitfalls when seeking to apply the concessions.
When assessing the basic conditions, entities and individuals who are considered connected or affiliated are taken into account. This can have the effect of pushing the taxpayer over the applicable turnover / asset thresholds.
Careful consideration should be given to the concessions, not just in the time leading up to a sale but when first structuring or restructuring a small business. A restructure near the time of sale can possibly have a negative outcome when applying the CGT concessions, particularly the 15 year concession.
The concessions can also be utilised to alleviate the tax burden in certain small business restructures, and to defer a taxable capital gain arising from the sale of a small business asset where a replacement asset is acquired within 2 years.
John has operated a successful florist as a sole-trader for many years and owns the premises from which the business is run. The business was commenced in 1992, with the premises acquired at the same time.
At age 63, John decides to retire and agrees to sell the business to the store manager at a capital gain of $500,000. He also sells the premises to the manager at a capital gain of $1 million. At the time of sale, the florist has an annual turnaround of $1.5 million. This has been steady for a number of years.
As John has operated the florist for more than 15 years, and is a small business entity, he is able to apply the small business 15 year exemption to completely negate all tax payable on sale of both the florist business and the premises.
Furthermore, he is able to contribute up to $1.895 million of the capital proceeds into superannuation, being $1.355 million under his lifetime CGT cap and $540,000 as a non-concessional contribution utilising the 3 year bring –forward rule (assume John hasn’t already used this concession in an earlier year).
How can we help?
When available, and utilised effectively, the small business concessions can provide a superior tax outcome on sale of a business or business asset, bolster superannuation balances, protect the sale proceeds and create wealth into retirement. An effective reward for many years of hard work building up a small business.
Whilst the concessions are complex, we can help guide you through the conditions applicable to your circumstances and advise whether the concessions are available. We can also assist in structuring your business to ensure you will be well placed to take advantage of the concessions in future.
If you have any questions about your circumstances, we invite you to contact Ben Taylor or your usual advisor at Baumgartners.
Ben is a Manager in the Business Services division at Baumgartners. With 8 years’ experience, he advises clients across a broad range of industries. Ben holds a Batchelor of Business from Swinburne University and is a member of CPA Australia and the Taxation Institute of Australia.