For many self employed people, their business and perhaps the building they own and operate their business from are seen as their superannuation. In this situation it is imperative that business owners are aware of the Small Business Capital Gains Tax Concessions that are available to them on sale of their business and business premises.
The concessions are available on the sale of “Active Assets”. Active assets are assets which are used in the business conducted by the taxpayer, or an entity connected with the taxpayer or their affiliate. Goodwill and business premises are the two most common examples of active assets. Shares in a company and units in a trust can be considered active provided additional criteria are met.
There are restrictions on who is eligible to apply the concessions. Generally speaking, if the business and connected entities have a combined turnover of less than $2 million, or assets of less than $6 million, then it is likely the concessions can be accessed.
The rules surrounding these concessions are complex and a detailed analysis of the business structures would be required to determine eligibility for the concessions, and the ways in which the benefits from the concessions can be maximised. The concessions are as follows:
50% Active Asset Reduction –
When an eligible “Active Asset” is sold and a capital gain is realised, the assessable gain can be reduced by 50%. This 50% discount is in addition to the general 50% discount which is available to individuals if they have held an asset for more than 12 months.
Small Business Retirement Exemption –
This exemption can be applied either in place of or after the 50% Active Asset Reduction. There is a lifetime limit of $500,000 per individual. If the individual seeking to apply the exemption is under the age of 55 the amount must be contributed to superannuation. If over the age of 55, there is no compulsion to contribute the funds to superannuation but the contribution does not fall under the non concessional limit so it can often be an attractive strategy to make the contribution voluntarily.
15 Year Exemption –
The most attractive of the concessions is the 15 Year Exemption. This can become available when an active asset has been owned for 15 years and is being sold in connection with an individual’s retirement. This concession results in the whole gain being entirely exempt from tax. It also opens up a unique superannuation limit which allows the individual making the gain to contribute a significant amount to superannuation which is not assessed against the concessional or non concessional limits.
Replacement Asset Rollover-
This concession is available when the intention is to purchase a replacement active asset. This concession does not result in the gain being exempt, but it essentially defers the gain until the new asset is sold. The above concessions may then be available on the sale of the replacement asset if the basic conditions are met at that time.