The Capital Gains Tax small business concessions apply to provide a measure of CGT relief on the disposal of certain assets by eligible small business taxpayers. This relief applies in addition to any CGT discounting relief the taxpayer may be entitled to.
The CGT small business concessions available include:
- Where you are over 55 and retiring, a total exemption of the gain on “active assets” held for 15 years,
- A 50 per cent discount for active assets (in addition to the general individual 50 per cent discount),
- A deferral of the capital gain if a replacement asset is acquired, and
- An exemption of up to $500,000 of capital gains under the “CGT retirement exemption”.
Who is eligible for the Capital Gains Tax small business concessions?
To be eligible for the Capital Gains Tax small business concessions, the following three basic conditions need to be satisfied:
- A capital gain must arise on disposal of the asset,
- Either your business turnover is less than $2 million, or the net value of your assets and the assets of entities connected with you is less than $6 million (this excludes personal use assets) and
- The asset disposed must be an “active asset”.
If the asset being disposed is a share in a company or an interest in a trust, you must be a “significant individual” or the spouse of a significant individual and have some ownership interest. Basically, a significant individual is a person who owns at least 20 per cent of the company or trust.
What is an active asset?
An “active asset” is an asset that is used or held ready for use in the course of carrying on the business, and can include goodwill. However, an asset which is used to derive passive income, such as rent, does not qualify as an active asset. The asset must have been an ‘active asset’ for at least half the time you have owned it, or for 7½ years, whichever is less.
How do the Capital Gains Tax small business concessions work?
Below is a description of each of the four available concessions. Before any of these concessions can be applied, you must satisfy the basic conditions.
1. The 15 year Exemption
If you (or your company/trust) have owned the business, or an asset of the business for 15 years, and you are aged at least 55 and retiring, or you are permanently incapacitated, the entire capital gain can be disregarded under the 15 year exemption. To apply the exemption the asset must have been used in the business for at least 7½ years during the total period that you owned it.
Once the 15 year exemption is applied, the capital gain is disregarded entirely and you therefore do not apply any further concessions.
Subject to meeting certain conditions, you can then contribute up to $1 million of the sale proceeds to superannuation under the CGT contributions cap.
2. The 50 per cent Active Asset Reduction
If the 15 year exemption does not apply, then the capital gain remaining after applying any normal CGT discounting may be reduced by a further 50 per cent. This 50 per cent reduction is available for individuals, trusts and companies. It is an optional concession, meaning that you do not have to apply it.
The 50 per cent active asset reduction is available where you meet the basic conditions (see above).
3. The Small Business Rollover
If a replacement asset is purchased within two years of the active asset disposal, you may be eligible to defer the capital gain until the replacement asset is subsequently disposed. Again, the basic conditions for the small business concessions must be met first.
4. The CGT Retirement Exemption
The remaining capital gain, after applying the general 50 per cent discount and the optional 50 per cent active asset reduction, can often be eliminated by applying the CGT retirement exemption. There is a lifetime limit of $500,000 per person available under this concession.
If you are under age 55 when the capital gain occurs, you must contribute an amount equal to the remaining capital gain into superannuation. This amount will be preserved in super until you meet a condition of release.
If you are over age 55 when you apply the exemption, there is no requirement to contribute the gain into superannuation. You simply elect to disregard the gain, up to a maximum of $500,000 when you complete your tax return.
The small business CGT concession rules are extremely complex and you should consult your taxation adviser to determine if the concessions are available to you.