In a recent article discussing Capital Gains Tax (CGT), we focussed mainly on how CGT can affect individuals selling a personal asset; however, we also mentioned that a future article would consider the concessions available for small business owners. So, what are the small business concessions? And why are they in place?
The Australian Tax Office (ATO) details four concessions that are available specifically for small business owners, they are:
- 15-year exemption: if you are over 55, plan to retire – or are permanently incapacitated – and have owned an active asset for at least 15 years, you won’t incur an assessable capital gain when you sell the asset. Basically, this allows you to sell off long-term active assets in preparation for retirement without facing large capital gains.
- 50% active asset reduction: small business owners can reduce the capital gain on the sale of an active asset by 50%. This is in addition to the more widely available 50% CGT discount, which is for assets owned for more than 12 months. This means that a small business that has owned an asset for more than twelve months will only be assessed on 25% (50% of 50%) of the actual capital gain for selling the asset.
- Retirement exemption: small business owners are exempt on capital gains up to a lifetime limit of half-a-million dollars; however if you are under 55, the capital gains must be paid into a superannuation or retirement fund. This exemption is a handy complement to the 15-year exemption, as it allows for the sale of a significant value of active assets that have been owned for less than the 15 years without incurring capital gains.
- Rollover: this allows you to defer a capital gain on the sale of an active asset for two years or more if you buy a replacement or incur expenses improving other existing assets. Basically this allows you to sell assets in order to upgrade without immediately facing CGT obligations.
The general benefit of these concessions is to allow a small business owner, who may be integral to the business and therefore unable to sell the business as a whole for a large profit before retirement, to at least be able to avoid large capital gains while building the business and to prepare for retirement through the sale of business assets (especially assets that have been owned and used by the business for an extended period of time) without facing large capital gains.
By Jennifer Lowe