Capital Gains Tax and the Sale of Your Business or Business Asset(s)

Do you run your own business? Are you thinking of selling it, or a part of it, or a capital asset within it?

Decisions of this kind can be some of the hardest but most important decisions you will ever make. With that comes a lot of questions and concerns, not least of all – “How much tax will I pay on any profit I make?” and “Are there any options available to me to minimise this tax?”

If you are thinking that these questions seem daunting, you would be right. The following concessions within the tax law could potentially reduce or even eliminate your tax bill, saving you a lot of worry, and a lot of money.

Capital Gains Tax (‘CGT’) is payable on the profit you make when you dispose of:

  • all or part of your business;
  • the shares or units of the entity through which the business is operated; or
  • a capital asset within the business.

However, depending on your individual set of circumstances, you may be able to avail yourself of the Small Business CGT Concessions to reduce or eliminate any tax due on disposal.

Small Business CGT Concessions

The four available Small Business CGT Concessions are:

  1. the 15-year exemption;
  2. the 50% (or ‘active asset’) reduction;
  3. the retirement concession; and
  4. the rollover.

The value of these concessions can have a major impact on the after-tax sale value of your business so, despite their complexity, are worthy of investigation.

The application of these concessions will depend on your individual circumstances, but generally you may be able to avail yourself of one or more of these concessions where:

1.    The turnover of the business is less than $2 million

or

Your net worth is less than $6 million (excluding the family home and superannuation);

and

2.    The asset(s) being disposed are actively used in carrying on the business for at least half the period of ownership. The definition of an asset extends to include shares in a company.

Key Benefits

Where able to be applied, and if applied correctly, the key (potential) benefits of these concessions could be:

  1. To receive up to 100% of the sale proceeds tax free.
  2. To have the ability to direct some or all of the net capital gain from the disposal into your superannuation fund – a concessionally taxed environment in itself.
  3. To allow you the flexibility to defer some or all of the capital gain where you use the amount deferred to:

a) Acquire a new (replacement) active asset; or
b) Improve an existing active asset.

General 50% CGT Discount

If you are not eligible or choose not to take advantage of the Small Business CGT concessions, you may still be eligible for the general CGT discount. This concession effectively halves the gain made on disposal of the business asset(s) where the asset(s) have been held for more than 12 months. This option is available where the taxpayer is an individual or trust.