Jun 22, 2015

Capital Gains Tax for Small Businesses

To put it simply, Capital Gains Tax (CGT) is a form of tax that arises from any sale of property or investment, whereby the amount taxed is the difference between the purchase and sale price. If you make multiple transactions throughout the year, then your CGT is taxed off the different between your total capital gains and total capital losses. This is then included as part of your annual income tax.

Capital Gains Tax can arise in a vast range of situations, some common ones for small businesses are:

  • The sale of an asset

  • A business structure or share structure change

  • Receiving distributions or dividends from having a share in a company

The CGT for companies is 30% of the capital gain, and for individuals this is determined at your marginal tax rate could be up to 45%.

If you are classed as a small business, there are quote a few CGT concessions provided by the ATO to reduce this, and depending on circumstances may be eligible for multiple CGT concessions until it becomes nil. This allows you to reach the best taxable outcome for your situation.

Small businesses are defined by the ATO as those that are one of the following structures: sole trader, partnership, company or trust and passing either of theses tests:

  • Have an aggregated turnover [1] of less than $2 million per year or;

  • Net assets equal no more than $6 million (this does not include personal assets)

Small Business CGT rollover

Small businesses are also eligibly for CGT rollover, whereby if you sell an active asset [2] of the business, and therefore liable for CGT, you may defer all or part of the capital gain made from the sale, for up to two years.

This may be deferred for more than two years, assuming that you acquire another replacement asset or if you incur expenses trying to improve an existing asset. You will not be required to pay the CGT until your gain outweighs your expenses, as such, you may offset your CGT when you sell an asset, to invest in something else.

Small business 50% asset reduction

This exemption allows you to reduce your CGT on an asset by 50%, if you’ve owned that asset for 12 months or more before sale (or date you incurred a capital gain).

To achieve this asset reduction, you will need to subtract the cost of the asset from the sale price, and then deduct any capital losses. Then reduce that amount by 50% and that is the CGT payable.

15-year asset exemption for retirees

This exemption applies if you have continuously owned an asset for 15 years, and you’re aged 55 or over and are retiring or permanently unable to work, when you sell the asset you will not have a taxable capital gain.

Retirement Exemption

This exemption allows you to provide for your retirement, whereby if you are under 55 years old and your total capital gains are not more than $500,000, rather than paying CGT, you may pay the exempt amount into a superannuation fund or retirement savings account.

Summary

There are several Capital Gains Tax exemptions that are available for small businesses, which allow you to reduce the amount of tax payable, depending on your situation. Hopefully this general guide has provided you with some information to help you understand CGT and see if any of the exemptions may apply to you.

For further information, visit the ATO Website.

[1] Aggregated turnover is the combined turnover of your business, and any businesses that are connected with yours as affiliates [2] Active Assets can be either tangible or intangible

This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting.

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