What CGT Concessions are Available for Small Businesses?

Are you eligible for small business CGT concessions? If your answer is ‘I don’t know’, then read on.

The following provides an overview of the criteria for the application of the various small business CGT concessions.

Qualifying for the CGT small business concessions

In order to qualify for the CGT small business concessions, the following conditions must be satisfied:

• a CGT event happens in relation to a CGT asset that the taxpayer owns in an income year, and the event would have resulted in a gain
• the CGT asset disposed of must be an “active asset”. Active assets are assets such as plant and equipment used, or held ready for use, in the conduct of a business. Intangible assets such as goodwill and trademarks inherently connected with a business can also be active assets. Specifically excluded from the category of active assets are assets that yield passive income, such as rental properties and financial instruments (loans, bonds, options, etc).
• at least one of the following four conditions applies:

– the taxpayer is a ‘CGT small business entity’ for the income year, ie., a small business entity that carries on a business in the year whose aggregated turnover for the year is less than $2m.

– the taxpayer satisfies the maximum net asset value test, which means the maximum net value of assets of the business and its related entities is less than $6m

– the taxpayer is a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

– the rules regarding passively held assets of affiliates or connected entities or of partnerships are satisfied in relation to the CGT asset in the income year

• if the CGT asset is a share in a company or an interest in a trust, and;
• if the CGT event involves the creation, transfer, variation or cessation of a right or interest that entitles an entity to either an amount of the income or capital of a partnership or an amount calculated by reference to the partner’s entitlement to an amount of the income or capital of a partnership, then that right or interest must be a membership interest of the entity in the partnership.

Types of CGT concessions for small business

1. 15-year exemption

A capital gain on the disposal of an active asset will be exempt from tax if:

• the active asset has been held by an individual (or an entity of which an individual is a significant individual) for at least 15 years, and
• the individual or significant individual is:
• at least 55 years of age at the time of the CGT event, and the CGT event is associated with the retirement of the individual or significant individual, or
• is permanently incapacitated at the time of the CGT event.

2. 50% small business reduction:

For those entities that qualify for the concession, a capital gain on the disposal of an active asset will be reduced by 50%. This is in addition to the general 50% CGT discount, and the application of any other CGT small business concessions.

3. Retirement concession:

A small business taxpayer can elect to disregard capital gains on active assets up to a lifetime limit of $500,000. If the taxpayer is under 55 years of age, the proceeds must be rolled into a complying superannuation fund. If the gain is made by a company or trust, the business person must be a significant individual of the entity, the entity must pay the proceeds to the significant individual, and the proceeds from the disposal must be used in connection with the taxpayer’s retirement. This concession can apply in addition to the 50% small business reduction.

4. Small business rollover relief:

A capital gain on the disposal of active assets by a CGT small business entity can be rolled over (and thereby deferred). If no replacement active assets are acquired within two years of the disposal, or the assets do not meet certain criteria, certain CGT events may be triggered. Like the above concessions, the 50% small business concession applies first, and this concession may be applied before or after the retirement exemption.

Some of these specific concessions have one or more additional qualifications that must be satisfied, so it’s important to speak to a qualified CGT specialist so you can understand your eligibility for small business CGT concessions and which is suitable for your circumstances.