For small businesses, the small business tax concessions offer substantial CGT concessions when selling or transferring business and are a core aspect of most restructures. There are four main concessions that can be implemented, some of which are able to be utilised concurrently with other concessions. This is a specialist area that, if properly utilised, can offer a substantial benefit in tax planning for a small business owner.
Accessing the concessions requires specialist advice and it is important to ensure that the concessions are carefully planned for. It is common that the small business tax concessions are incorrectly applied through a lack of planning or through failing to meet the primary criteria. We often assist business owners that assume that they are eligible for the concessions but have not met the primary requirements and are in for a shock.
The small business tax concessions are a core tax planning option and if managed well offer a substantial benefit for small business owners.
There are several concessions that can be applied to a small business during restructuring. The concessions, which are not exclusive, are listed below.
- 15-Year Exemption
If your business has continuously owned an active asset for 15 years and you are over 55 and retiring or no longer working, there is no taxable gain when the asset is sold. This is substantial, and for long term business owners this requires clear structuring in order to ensure that the benefit is retained.
In retaining the 15-year exemption it is important to ensure that there have not been changes to the business structure during this period, also that the business has not taken steps to remove this concession.
For example, Joan acquired her business in 1990. During that time, she has not changed ownership and has maintained the ownership throughout. The business that was originally acquired for $100,000 in 1990, is now being sold for $2,000,000. As the asset has been owned for the entire period and the 15-year time period has expired, on the sale of the business the entire $1,900,000 gain would be ignored.
Had Joan transferred the business to a company in 2014 or transferred the ownership to a trust, she would be ineligible for the 15-year exemption and would be required to pay tax on a $1,900,000 gain.
- 50% Active Asset Reduction
Under the small business tax concessions, where an active asset is being sold, an additional 50% discount (on top of the normal 50% general discount) can be applied, so that means that the gain is reduced from 100% to 25% through the application of the reductions.
An active asset is considered to be one that is a core component of the business and clearly identified as being aligned with the business. Assets that would generally be considered to be active assets are those that have a clear nexus to the business (such as premises or intellectual property), where we can tie the utilisation back to the business then the active asset will be sufficiently tied to claim the concession. In determining the ability to claim active assets for small business tax concessions it is a simple test but one that can be complicated if there are mixed used or complicated assets (such as work at home offices or assets used by the owner in different manners).
- Retirement Exemption
The capital gain from the sale of a business asset are exempt from capital gains up to a lifetime limit of $500,000. For those under 55, this amount has to be contributed to a complying superannuation fund. The retirement exemption is a lifetime limit and cannot be doubled counted, it can be utilized on multiple occasions up to the $500,000 to be a threshold.
In utilising the retirement exemption under the small business tax concessions, ensuring that the concession has not been used in the past, is an issue that we often find has been overlooked and there is a risk of multiple claims. In understanding this concession, over time it may be necessary to review previous advice to ensure that the concession has not had multiple usages.
- Rollover or Replacement Asset
Where an active asset is sold, a small business tax concession allows for the deferral of all or part of the capital gain for two years, or longer, if there is an acquisition of a replacement asset or an investment into a capital improvement of a capital asset. The replacement asset allows for a small business owner to acquire a replacement or new asset or invest into a new business without needing to incur the CGT liability.
We use this concession as part of implementing small business tax concessions. This is a valuable concession where a business is planning to sell and then buy a new business. Equally, this concession is useful where an entity is looking to invest back into an ancillary or associated business. The replacement asset is a mechanism that allows for the continual deferral of the gain until either the retirement exemption is used, or a rollover is practical into superannuation at the end of the business career.
Eligibility for Small Business Tax Concessions
In order to eligible for the small business tax concessions, a business needs to meet one of the conditions:
- it has an aggregated turnover of less than $2,000,000; or
- you have a net investment of assets of less than $6,000,000; and
- the asset being sold is used in connection with the business.
An Aggregated Turnover of Less than $2,000,000
In understanding turnover, it is important to analyse the associated businesses, in that if a business owner has a substantial interest in another business, these may be grouped for the purposes of calculating the turnover.
You have Net Investment Assets of Less than $6,000,000
The net investment assets test is an important test and one that is often misunderstood or miscalculated. Assets that are counted may include cash held in an offset account which, whilst secured against the family home will be counted as an asset. Equally the valuation of assets needs to be on an arm’s length basis, so that for business owners that are near threshold it may be necessary to seek formal valuation rather than book valuation. The net investment assets test does not apply to personal assets, for example,a home or superannuation are exempted
Asset must be in Connection to the Business
There are other concessions that will apply and depending upon the overall circumstances these will depend upon the nature of the ownership of the business and what concessions you are intending to claim.
It is important to remember that the concessions will continue to apply until the total gain is reduced to zero.
In order to determine turnover calculating associated entities is a core component, we have assisted several business owners that have failed to properly account for businesses that they have an interest in, and they have lost the concessions as a result of this.
Managing the Concessions
The benefit of the small business tax concessions is substantial, but it is important to ensure that the criteria are clearly met. Failing to properly execute these is substantial risk and will result in the simple loss of the concessions, as there has already been a trigger point, this would mean a sale has already occurred. In determining if the concessions will apply, a business owner needs to make sure that they are eligible for the small business tax concessions, and that the assets that they are intending to sell are compliant with the requirements.