reducing Tax on the sale of a business
To qualify for CGT relief when selling a business several tests must be passed. The first requires the business will to be classed as a Small Business Entity or be a partner in a partnership that is an SBE. A small business entity is a business that has an income turnover of less than $2 million.
Were a business is not classed as an SBE it must pass the net assets test, and the capital gains tax concessions only apply to active assets, and where the business is operated either by a company or a trust the significant individual test must be passed.
Active assets tests
There are two tests that decide what an active asset is. Firstly, an active asset must have been or is used in the carrying on of a 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.
Net assets test
- Personal and private use assets such as a home or holiday house,
- Their balance in a superannuation fund including both accumulation and pension phase accounts,
- A life insurance policy.
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.
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.
For the remaining concessions available to individuals, but not companies as they don’t qualify, the 50% general capital gains tax exemption must be applied first.
If you are selling your business and want qualify for the small business CGT concessions, want to have a succession plan drawn up to sell your business so that you qualify for the small business concessions, or need help in growing the value of your business, contact us at TaxBiz Australia.
