There are four Capital Gains Tax (CGT) concessions for small businesses that allow you to lessen the impact of a capital gain from an active asset that is being used in a small business. All four concessions rely on the same basic conditions to be met:
- you’re a small business with an aggregated annual turnover of less than $2 million
- your asset was used in a closely connected small business
- you have assets no greater than $6 million excluding personal use assets such as your home.
Beyond these basic conditions each of the four concessions has its own set of unique conditions that need to be met. How you combine these four concessions is key as it can result in different tax outcomes.
Subdiv 152-B 15-Year Exemption
The most generous of these concessions is the 15-year exemption which exempts the entire capital gain without a cap.
This exemption only comes into effect if:
- you’ve owned an asset for at least 15 years and you are at least 55 years old
- The CGT event coincides with your retirement or permanent incapacitation. However what coincides with retirement or incapacitation can be a point of contention.
If you qualify for the 15-year exemption you don’t need to utilise any other concessions as your entire capital gain is being disregarded. This exemption has priority over all the others and if you qualify it will apply to you.
Subdiv 152-C 50% Reduction
The moment you pass the basic conditions for this reduction you can have it. The 50% reduction allows you to reduce the capital gain on an active asset by half, plus potentially apply the remaining two CGT concessions (retirement and rollover).
This concession puts a cap of $500,000 on your capital gain and it applies to small businesses with an aggregated annual turnover of less than $10 million.
The 50% reduction will apply as long as both:
- the asset is used in the small business that produced the small business income or is held for trading stock (if no small business was involved), and
- you connected with the small business at least 7 years before you dispose of the asset.
Subdiv 152-D Retirement Exemption
If you’re retiring from an active small business and own small business assets you can transfer small business CGT assets to your super fund and make use of the small business concessions.
For the retirement exemption you can claim a capital gain from the sale of active assets as exempt up to a lifetime limit of $500,000. There’s a small catch though, if you’re under 55, the exempt amount must be paid into a super fund or a retirement savings account.
This retirement exemption often picks up the last of the capital gain that is left after the above mentioned 50% reduction.
For example, say the capital gain is $2mil. The 50% CGT discount brings it down to $1mil. The 50% reduction brings it further down to $500,000. Then if you are eligible to claim the $500,000 retirement exemption, then you’re able to walk away with $2mil tax free.
Subdiv 152-E Rollover
This rollover allows you to defer all or part of a capital gain for two years. This can be extended if you acquire a replacement asset or incur expenditure on making capital improvements to an existing asset. The choice is up to you as to whether you rollover the entire capital gain or just a portion (after the 50% reduction and retirement exemption).
This rollover is only really of use if you’re planning a small business restructure and know exactly how much capital gain you’ll have after the 50% reduction.
If you’re eligible to utilise any or all of these small business CGT concessions we can run the numbers on each concession so that you can make an informed decision as to which one will provide the most cost benefit for your small business. Get in touch with us today to see how you can benefit.