Briefly put, the Capital Gains Tax (CGT) is the tax you pay on any capital gains, most commonly made by selling things such as vehicles and property.
The government’s examples of a CGT event include giving away an asset to someone else, the destruction of an asset, shares you own being surrendered, or moving to another country. There are many concessions on the tax, and the government has set up a few specifically for small businesses. More excitingly, small businesses can apply as many concessions as they are entitled to until the tax is reduced to nothing. Here’s what you need to know.
First things first
The Australian Taxation Office says it’s important to note that if you want to apply for a CGT discount, you must do so “after offsetting your capital losses against your capital gains, but before applying the small business CGT concessions”.
Meeting the basic conditions
According to subdivision 152-A of the Income Tax Assessment Act of 1997, you qualify for small business CGT concessions if: you’re a small business entity, or if you don’t do business but have passively-held assets, or if you’re a partner in a small business entity, or if you satisfy the maximum net value asset test. The asset that you want concessions for also has to satisfy the active asset test.
The 15-year exemption
If you’ve owned an active business asset for 15 years or more, it may be exempt from the CGT. There’s also no need to offset the gain with any current or previous losses, which allows you to use those losses to offset other gains not covered by the 15-year exemption.
More excitingly, small businesses can apply as many concessions as they are entitled to until the tax is reduced to nothing.
The 50 per cent asset reduction
This lets you reduce the capital gain from an active business asset by 50 per cent. The Taxation Office notes that you can choose to skip the 50 per cent reduction and go straight to the retirement exemption or the CGT rollover if that would help you get the best tax result.
The retirement exemption
You can exempt the capital gain on a business asset up to a limit of 500,000 dollars, allowing you to save for retirement. Additionally, if you’re the sole trader or partner, you can use the retirement exemption as long as you don’t exceed your limit, or if you contribute the exempt amount into a superannuation fund or retirement savings account and if you’re under the age of 55.
The roll over concession
You can defer the capital gain from the disposal of a business asset for a maximum of two years. This might not be a good first option, though, because while it allows businesses to defer part or all of a gain, other concessions can exempt or reducing that gain.
The government’s complete guide to capital gains tax concessions for small businesses can be found here.
Jan is a Sydney-based writer and editor whose work has been published in a stable of titles including the National Post, The Daily Planet and Edmonton Examiner. He is currently Editor at ShortPress.