For many people, tax is confusing. Throw another complicated layer of what is Capital Gains Tax (CGT) as part of that tax equation and you wonder why you can’t work out your personal tax – you are not alone. The majority of Australians would not be able to work out their tax payable let alone how much capital gains to be included in your annual tax filing. Living life as a small business owner can make things seem even more complicated, with worries about maximizing cash flow and minimizing tax obligations even more important.
To understand what impact CGT may have on your business, it’s important to first be clear about what it is – and what it’s not.
Put simply, CGT is the tax that you must pay on any capital gain. Don’t think of it as a separate, unique tax – really, it’s just part of your total income tax.
Common ways you may make a capital gain or loss is by selling off assets. These assets may include:
CGT is governed by what is known as CGT events. A CGT event is when you either sell or dispose of an asset to another party.
This can include:
This 90% test applies when there is an interposed entity existing between any CGT concession stakeholders and the company or trust that holds the shares or interests.
When it comes to CGT concessions that impact on your small business, there are 4 small business CGT concessions that can help to reduce your capital gain on business assets. If you meet certain conditions, you are eligible to apply for any concessions you are entitled to – giving you the opportunity to reduce the capital gain to nil.
The four conditions are:
If you’re a retiring business owner over the age of 55, this is a no assessable capital gain when selling a business asset that has been owned for 15 years. The concession also applies to anyone who is permanently incapacitated. This usually gives the best outcome as you may pay zero tax on any gain if you meet the requirements.
This enables you to reduce your capital gain on a business (active) asset by 50%. Note this is separate to what is known as the CGT discount.
Any capital gain from selling a business asset will be exempt - with a lifetime limit of up to $500 000. If you are under the age of 55, expect to pay the exempt amount into either a complying superannuation fund or a retirement savings account.
Under this method, which allows you to defer a capital gain on a small business asset, you don’t include the gain in your income until a change in circumstances triggers a CGT event that then brings the deferred gain into a subsequent taxable event. This includes if you don’t buy a replacement asset within the required time, or you sell the replacement asset. Note again this is really just a deferral – still need to deal with any gain on the replacement asset.
How can Nexia Edwards Marshall help you?
For more advice about the way capital gain tax concession can affect your business, including death and small business CGT tax concessions, please contact Grantley Stevens or your Nexia Edwards Marshall Adviser.
The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.