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Being tax-smart when selling a small business
The sale of a business can be a reward for years of hard work. But making the most of that reward is often down to careful planning, especially with regard to tax and superannuation.
Many business owners aren’t aware of the capital gains tax (CGT) concessions available when selling a business.
Broadly, there are four CGT small business concessions. The first of these applies to those looking to move into retirement.
If you are over 55 when you sell your business, have owned it for a continuous period of at least 15 years, and the sale is made in connection with your retirement, you won’t pay CGT. In addition, amounts from this exemption may be able to be contributed to your super fund without affecting your non-concessional contributions limits.
If, however, you are under 55, the money from the disposal of your business is CGT exempt if it is paid into a complying superannuation fund. In other words, you can choose to disregard any or all of a capital gain if the sale proceeds are contributed into a super fund.
A lifetime limit of $500,000 applies, but you can keep utilising this exemption over the course of multiple asset sales.
Again, amounts from this exemption may be able to be contributed to your super fund without affecting your non-concessional contributions limits1.
50% active asset reduction
If, however, you’re not ready to retire, or have not owned your business for 15 years, you can elect to reduce CGT by 50%, if the small business qualifies as an active business asset. This is in addition to the 50% CGT discount if you’ve owned the business for 12 months or more.
By electing a roll-over, you can reinvest the proceeds from the sale of your existing business into a new business and defer the making of a capital gain from the sale until you ultimately dispose of the new business.
You have up to two years post-sale to acquire the new business, but even if that doesn’t happen, the roll-over provisions could be used to defer your CGT obligations to a later income year.
It’s important to be sure that you are able to satisfy the basic conditions for these concessions. In short, the turnover threshold for small business CGT concessions is $2 million while the maximum net value of all CGT assets must not exceed $6 million. Legislation around this eligibility was recently amended as the $6 million net asset test was previously imposed on business owners, not the business itself.
Federal Treasury has also adopted new legislation related to small business CGT concessions, as they apply to partnership arrangements. Previously as an example, 5 partners owning a 20% stake in a business were assessed against the above rules individually. Following the new changes, the total combined asset value of the partnership is assessed. In some cases, this may mean that an individual with a stake that met previous eligibility tests will no longer be eligible for small business CGT concessions as the larger entity does not meet the small business criteria. In short, it may be a good time to seek advice.
If used effectively, these four CGT small business concessions can provide substantial tax savings. In some cases, these can be accessed in combination with other CGT exemptions, rollovers and concessions that aren’t specific to small businesses.
Small business CGT concessions are extremely valuable and can allow the CGT on a business sale to be substantially reduced, or, in some cases, eliminated.
A little strategic planning will also result in a large boost in retirement income. A true win-win, and it’s all made possible by being tax-smart.
1 The concessional 15% tax on superannuation contributions apply to contributions in any financial year of up to a maximum $25,000. A further maximum of up to $75,000 in any financial year can be made from after-tax earnings.