Minimising tax on selling a business
to qualify for CGT relief when selling a business several tests must be passed. The first requires the taxpayer wanting to claim the concessions to be a Small Business Entity or be a partner in a partnership that is an SBE. The other tests are the Net assets test, the active assets test, and the significant individual test for companies and trusts.
Net assets test
To pass this test the net assets of the taxpayer, including the net assets of connected entities, affiliates and entities connected with affiliates, must be less than $6 million.
For individuals some assets are not included in the net asset value. These include the value of an individual’s:
- personal and private use assets such as a home or holiday house,
- a dwelling that produces assessable rental income but a tax deduction cannot be claimed for any interest on a loan used to purchase the property,
- a super fund that pays the taxpayer a pension, annuity or allowance,
- a superannuation fund still in accumulation phase; and
- a life insurance policy.
For a business the net value is calculated by deducting total liabilities of the entity, such as hire purchase contracts and provisions made for holiday pay and long service leave, from the market value of assets of the entity. The market value is not the cost of the assets but what they could be sold for.
Active assets tests
There are two tests that decide what an active asset is. Firstly an active asset must have been used in the carrying on of the business, such as a factory or an office, or is an intangible asset connected with the business such as goodwill or trademarks. An active asset can include shares in a company where 80% of the value of the company is made up of active assets. They also include assets owned by another entity connected with the business.
To satisfy the second test the asset must have been an active asset for a set period during the time the asset was owned. For assets owned less than 15 years they must have been an active asset for at least half of the time. Assets owned for more than 15 years must have been active assets for at least seven and a half years.
Significant individual test
Businesses operated through a company or a trust must pass one further test. Unlike partnerships, where all of the partners can receive the small business CGT concessions, for companies and trusts these concessions are limited to people who pass the significant individual test.
In a company a person qualifies as a significant individual by having at least 20% of the shares in the company that exercise voting power and are entitled to receive at least 20% of the income and capital from the company.
For discretionary trusts a person passes this test if, in the year the capital gain is made, they receive at least 20% of the income and capital distributed.
Once the various tests have been passed a taxpayer can access the four concessions:
- the 15-year asset exemption;
- the 50% reduction for active assets;
- the retirement exemption, and
- the roll-over deferral concession.
These concessions are available to individuals after the 50% general capital gains tax exemption has been claimed. Under the 15-year asset exemption the whole of the capital gain is exempt from tax if several conditions are met. For the other three concessions capital losses must be offset against the capital gain before the concessions are applied.
If you are going to sell your business and want to make sure you qualify for the small business CGT concessions, want to have a succession plan drawn up to sell your business with the least amount of tax payable, or need help in growing your business so that you maximise the value of your business, call us at TaxBiz Australia.