Understanding CGT Concessions When Selling Your Business

Looking to sell your business and not sure of what the Capital Gains Tax (CGT) implications could be on the sale of the business?

Do you know how small business CGT concessions can apply to the sale of your business?

The small business CGT concessions are concessions in the legislation for small businesses which have an aggregated turnover of under $2 million or the market value of your net assets are under $6 million. Should you meet either of these conditions you could potentially sell your business without paying Capital Gains Tax.

How I hear you ask? We will discuss these in details later in this article, however here is an example of Joe, who has a manufacturing business.

Meet Joe: He is ready to retire and going to sell his business.

Joe purchased a manufacturing business for $100,000 in 2005. The business had a sales turnover of $900,000 in 2017 and likely to get to $1 million for the 2018 Financial Year.

Joe operates his business through a family trust and has been distributing the income entirely to himself over the last five years.

At age 57, Joe has bought himself a caravan. He is ready to retire so he can travel around Australia so has made the decision to sell his business.

He is going to sell his business to one of his staff who has been with him from the beginning of the business, Tony who is committed to the purchase and will take over the business on 1 July 2018. Joe sells the business to Tony for $650,000.

Joe’s cost base is $100,000 and therefore the capital gain on the sale of the business is $550,000 ($650,000-$100,000).

What are the Small Business CGT Concessions?

There are the following small business CGT concessions that are available to small business owners who meet the basic conditions of the turnover test and the net asset tests.

The 15-year exemption

This is available when the business has been owned for 15 years by the same owner. Under this exemption, the taxpayer’s capital gain is entirely disregarded and no other concessions can be (or in fact need be) applied. This concession is applied before any capital losses are applied against the gain.

Capital losses

The taxpayer’s capital gain is then reduced by:

• any capital losses from the current income year; or
• any previously unapplied net capital losses from prior income years.

CGT discount

If the asset has been owned for over 12 months, the capital gain is reduced by the 50% discount.

50 per cent reduction

A capital gain or discount capital gain can be reduced by the Active Asset reduction which is also at 50%.

The active asset reduction is optional. A taxpayer can choose not to apply the concession in order to maximise use of the retirement exemption (mentioned later in this article).

Retirement exemption

The retirement exemption and/or the small business roll-over may be applied as alternatives, or in combination, to reduce a capital gain. The retirement exemption is based upon the following:

If 55 years of age or over, you can utilise the $500,000 retirement exemption. This is the lifetime cap or;

If under the age of 55, you can still utilise the $500,000 retirement exemption, however you will need to contribute the remainder into superannuation in order to maximise the tax free exemption Note 1.

How can we apply these concessions to Joe?

Joe’s $550,000 capital gain is subject to three separate capital gains tax concessions, being the 50% discount that applies to all assets, the active asset exemption and the retirement exemption.

Their combined effect is cumulative, and in summary, this means no Capital Gains Tax is payable on Joe’s capital gain.

This is a very basic example of how small business CGT concessions can apply to the sale of a business. We ask that you seek advice based upon your specific circumstances in order to determine your eligibility for these concessions.

This can be a complex area and it is important to get the right advice. Should you be in a situation where you are considering or are ready to sell your business (whether that is to retire or not), contact HBT Advisory to discuss your business and what small business CGT concessions could be available to you.

Note 1: We note that you should obtain financial advice on making a contribution into superannuation and we can assist you regarding this process.