The CGT Small Business Concessions: What you need to know…

What are the Small Business CGT Concessions?

The small business capital gains tax (CGT) concessions allow exemptions and or deferrals of CGT liabilities when businesses (or other active assets) are disposed of or restructured by a taxpayer.  They are established under Division 152 of the Income Tax Assessment Act 1997 (Cth). 

The concessions should not be confused with the small business rollover relief contained in subdivision 328-G which provides a tax deferral of CGT liabilities where there is a genuine restructure of a business (including a change of legal structure) that allow the transferor’s cost base of the to be rolled over to the new owner.

Qualifying for the Concessions

In order to qualify for the small business CGT concessions the taxpayer must satisfy four conditions, being:

1.   the occurrence of a CGT event,

2.   the existence of a resultant taxable capital gain,

3.   meeting the test for:

  • a.   a maximum net asset threshold for the taxpayer of $6million; or
  • b.   qualifying as a “small business entity”, and

4.   the asset in question must be an active asset.

The $6million asset test threshold will include assets of connected entities[1] and affiliates[2] of the taxpayer but excludes certain assets that are for personal use, main residence, superannuation or life insurance policies[3].

Alternatively, to qualify as a small business entity the taxpayer must meet the conditions in subdivision 328-C, which are primarily that the entity is genuine small business and had an annual turnover of less than $2million in the previous financial year or is likely to have aggregated turnover of less than $2million in the current financial year. Again there are rules for items that should be included and excluded from the calculation[4]

Active assets must meet the qualifications in section 152-35, namely that the asset if owned for less than 15 years has been actively used at least half the time and if owned for more than 15 years has been active for at least 7.5 years. There are particular rules also relating to interests in companies and trusts.[5]

The Concessions

The actual concessions themselves are as follows:

·        The 15 Year Exemption[6]: A taxpayer can disregard a taxable capital gain on an active asset owned for at least 15 years. This exemption has the effect of completely negating the CGT liability if the taxpayer is over 55 and disposes of the asset in connection with retirement. Capital proceeds may also be contributed to superannuation up to the CGT cap[7].

·        The 50% Small Business Reduction[8]: If the 15 year Exemption is not available a taxpayer may use this concession to reduce their capital gain by 50% (on top of the general 50% CGT discount[9]).

·        The “retirement exemption”[10]: Up to $500,000 of the taxpayer’s gain is disregarded if the capital proceeds are used in connection with the taxpayers retirement.

·        The “small business rollover”[11]: Any tax on an active asset replacement is deferred provided the replacement asset is acquired no more than one year before CGT event occurs and not more than two years after, effectively allowing the taxpayer to defer tax payable for up to two after disposal.

Through the use of one or a combination of the above concessions, small businesses can substantially reduce their exposure to CGT.

If you require any further advice on this topic you should make an appointment to see Anthony Snooks of our office or your regular accountant.  This advice is general advice only.  Specific tax advice should be sought in relation to your particular situation.    

[1] See section 328-125 for the definition of connected entities

[2] See section 328-130 for the definition of affiliates

[3] See section 152-20(2)

[4] See section 328-115 for the definition of aggregated turnover

[5] See Subdivision 152-A

[6] See Subdivision 152-B

[7] See section 292-100

[8] See Subdivision 152-C

[9] See Division 115

[10] See Subdivision 152-D

[11] See Subdivision 152-E

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