Capital Gains Tax Implications Upon The Sale Of A Business
When the decision is made to sell your business it is as important to understand the capital gains tax implications as it is to ensure that you maximise your selling price. There are a number of concessions within the Australian tax law that if applied correctly can result in a small business owner walking away with a significantly reduced tax bill. The following summary steps you through the process.
The first step is to work out if you meet the basic conditions. Generally you may be eligible to apply the concessions if:-
- You are a small business entity (i.e. you carry on a business and have a turnover of less than $2 million); or
- Meet the maximum nett asset value test (Your nett worth and that of your associates is less than $6 million).
If you are invested in a number of business through various entities, you would need to combine the turnovers of all entities that you control to be able to meet the turnover threshold in test 1.
Once you have determined that you meet the basic conditions, there are four different concessions that you can look to apply. They are as follows:-
- The 15 year exemption;
- The small business 50% active asset reduction;
- The small business retirement exemption;
- The small business rollover.
The 15 year exemption
This is the most attractive of the exemptions and allows you to disregard any capital gain from the business sale if you have held the business for more than 15 years. To qualify for the exemption you would need to be over 55 years of age with the event being connected to your retirement or you are permanently incapacitated. If you are carrying any capital losses these do not need to be utilised before applying the exemption and can be held on to for application against other gains.
If you do not meet the requirements of the 15 year exemption and you have capital losses carrying forward from previous years or have incurred any in the present year these should be applied prior to applying any further concessions.
If you have been an owner of the business for more than 1 year you will qualify for the capital gains general discount which allows you to discount any gain by 50%.
The 50% active asset reduction
From here you can choose to apply any of the concessions you qualify for individually or together. The 50% active asset reduction allows you to reduce any capital gain by a further 50% allowing you to effectively reduce the taxable gain from the sale of a business to only 25% of the gain if no other concessions apply.
The small business retirement exemption
Under this exemption a business owner would be able to disregard any capital gain in relation to the sale of a business up to a lifetime limit of $500,000 after applying any reductions/concessions previously discussed. To qualify the taxpayer would need to be either over 55 or if you are under 55 make a payment equal to the exempt amount to a complying superannuation fund or retirement savings account. An election to use this concession needs to be made in writing and importantly, you do not need to stop work to take advantage of this exemption.
The small business rollover
This concession allows you to defer all or part of the gain for 2 years or longer if you invest the proceeds from the business sale into a replacement asset (e.g. a new business or business asset) or you incur expenditure in making capital improvements to an existing asset. If no investment is made by the end of the 2 year period then you will be assessed on the amount of gain that has been deferred.
Having stepped through the process above, a lot of business owners are able to significantly reduce their capital gains tax liability if not to nil. However, this is a complex area of tax law and the discussion here is only to provide you with an insight of what may be able to be achieved with some proper planning. Prior to selling your business, it is advisable that you consult with a tax advisor to understand what the implications are of any sale taking into account your entity structure, age and future plans for working and retirement.