This small business CGT concession overview will give you a rough map of the most generous concessions for small business in Australia.
Small Business CGT Concession Overview
Imagine the small business CGT concessions didn’t exist.
Let’s say you have a small business. And your business is your life. Started from scratch 30 years ago. Risked the family home during the GFC to keep it alive. Gave a dozen of people good steady jobs. Was part of the engine that drives Australia.
Now you got an offer to sell. With a $1m capital gain. That will give you a marginal tax rate of 47% including Medicare.
You bore all the risk, risked everything, gave everything. And now the ATO takes 47%?
Doesn’t feel right. So here come the small business CGT concessions. If you meet the conditions of Div 152, you will pay a lot less tax, maybe even no tax at all. It can change a life.
Basic Conditions
The small business CGT concessions are very generous. But to get them you have to meet the basic conditions in Subdiv 152-A ITAA 97.
Condition # 1 Turnover
You need to either carry on a business and pass the small business turnover test with a turnover of less than $2m.
Condition # 2 Net Asset Value
Or you must pass the maximum net asset value test and have net assets of $6m or less. Your net assets include your interest in the business as well as certain assets of your affiliates and connected entities. But your net assets don’t include your main residence, personal use assets and superannuation for this test.
Condition # 3 Partnership
Or if the asset is a partnership asset, then the partnership as a whole must carry on a business and meet the turnover test. If that fails, then the partner’s proportionate share of the partnership will go into the partner’s next asset value test in # 2.
Condition # 4 Passively Held
Or the asset is passively held and used by an associate or connected entity in a small business entity.
Now the good news is that you only need to pass one of these 4 conditions. If you sell your business for $10m, you will probably not pass the maximum net asset value test, but you might still pass the turnover test.
A capital intensive business like a farm for example might hold land worth more than $6m, but have a turnover of less than $2m.
So that is the first step and an either-or-or proposition. If you fail one, you can still get through if you pass another one.
Condition # 5 Active Asset Test
But you need to always pass the active asset test. This means that the asset must have been part of your business. ‘Used or held ready for use’ is the term they use.
Condition # 6 Shares or Units
And if the CGT asset you sell is a parcel of shares or units, then this turns into a completely different ball game again. # 1 to # 5 still apply but there are additional hurdles. CGT concession stakeholder and small business participation percentage are just two concepts that will be thrown into the mix.
But let’s assume that no shares or units are involved. That you are a sole trader selling your business. Much simpler to understand the concept that way.
So these are the basic conditions. They always apply. No matter what.
CGT Concessions
So what do you actually get with all this? There are 4 small business CGT concessions in Div 152 of ITAA97. They all rely on the same basic conditions. No matter which one you want to claim, you need to pass the same basic conditions.
But past these basic conditions, each of the four concessions is unique with their own set of rules and requirements.
And how you combine these four is important as well and might result in different tax outcomes.
Subdiv 152-B 15-Year Exemption
The first and most generous exemption is the 15-year exemption. It is unique in that it exempts the entire capital gain without any cap. Think about that. The entire capital gain: Tax-free.
This exemption takes priority over the other three exemptions. And it applies before any capital loss offset. So you can keep any capital losses and use them later.
But to pass you must have owned the asset for at least 15 years and be at least 55 years old.
And the CGT event must happen in connection with your retirement or permanent incapacitation. What is or isn’t “in connection with your retirement” is often a point of contention though.
If you qualify for the 15-year exemption, you can stop reading here. Anything that comes after this won’t affect you anymore since your entire capital gain is disregarded. This exemption has priority. If you qualify, it applies whether you like it or not. But we have never met a living soul who doesn’t like this one.
Subdiv 152-C 50% Reduction
This one is easy. The moment you pass the basic conditions, you have this one in your pocket. You don’t have to apply it but you can.
The 50% reduction allows you to reduce a capital gain by a further 50%. Why further? Because you probably already got the 50% CGT discount in Div 115.
That discount gives individuals and trusts a 50% and superannuation funds a 33.1/3% CGT discount. They just need to have held the asset for at least 12 months.
So that is the 50% CGT discount. But in addition you get the 50% small business reduction when you pass the basic condition. And after that you can still apply the other two exemption to any remaining capital gain.
Subdiv 152-D Retirement Exemption
This one is also easy even though it comes with slightly more fineprint. You can claim a capital gain of up to $500,00 as exempt. But not more – ever. That is the lifetime cap.
And there is one more catch. If you are under 55, you have to pay the exempted amount into super. Some people don’t like that. And so they skip this one or park it via the rollover with a J5 event.
The retirement exemption often scoops up the remaining capital gain that is left after the 50% reduction.
Let’s say the capital gain is $4m. The 50% CGT discount brings it down to $2m. The 50% reduction brings it down to $1m. And then you and your spouse claim $500,000 retirement exemption each. And voila. You walk away with $4m tax-free in your pocket. Not bad.
Subdiv 152-E Rollover
This one will buy you time. Your capital gain is not disregarded just yet, but you defer paying tax on it.
This rollover relief allows you to defer the capital gain for at least two years or beyond two years if you acquire a replacement active asset or incur capital expenditure on active assets. You can choose to rollover the entire capital gain or just a portion after the 50% reduction and retirement exemption. The decision is yours.
If you don’t acquire a replacement asset withing the 2 years, you trigger CGT event J5. But guess what? That might be exactly what you had inteded.
By now you might be 55 and no longer have to put the retirement exemption into super. So now you apply the retirement exemption and walk away with the cash tax-free.
So that was a quick small business CGT concession overview to give you a rough idea. To show you what is possible.
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Small Business Tax Concessions
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