Did you know that there are Small Business Concessions available, which means you could potentially sell your business and not pay one red cent of Capital Gains Tax?
As a rule, selling shares in your business or perhaps the business assets themselves would trigger a Capital Gains Tax (CGT) event. However, provided certain conditions are met, concessions may be available to reduce this tax bill to $0.
The Small Business CGT concessions, brought in close to 20 years ago, were introduced to allow owners of assets that would attract a CGT event, to enjoy a partial or full reduction in the amount of Tax payable on its sale (thank you, Johnny Howard).
Let’s take Gina as an example. Gina, 53 years old, has been running an IT company for 12 years and has built the company’s turnover to $1,750,000. Gina is looking to sell her business for $1,000,000 after costs (Net Sale Price). Like most small businesses, if the company was started by issuing Gina a $100 share, the total cost base of Gina’s investment is $100. The gross Capital Gain on its sale would be $999,900 (Net Sale Price Less Cost Base).
As Gina has held the shares in her company for over 12 months, she would be eligible for the 50% discount on the sale of the shares. This would mean that Gina has a reduced total Gross Capital Gain of $499,995 i.e ($999,900 * 50%).
Further reductions in the payable Capital Gains Tax are generally available to operating businesses with a group turnover of less than $2 million OR group net assets of less than $6 million. In such scenarios, it is important that great care is taken to ensure the eligibility criteria is met.
If eligible, there are additional four small business CGT concessions available to Gina, which may in full or partially reduce the $499,995 on the sale of her business. The four concessions are as follows:
- 15-year CGT asset exemption
- 50% reduction
- Retirement exemption
- Rollover relief
It should be noted that such concessions are available in a number of situations but in most cases are utilised when restructuring, winding down or exiting a business.
- 15-year CGT asset exemption (Subdivision 152-B): This concession is prioritised above all other concessions as it would essentially deem the entire gain as exempt. To be eligible for this, the business owner must continuously own the asset (business) for at least 15 years as a “significant individual” and be 55 years or older before the event. The sale must also be “in connection” to their retirement. In the case of Gina, she would not qualify for this exemption given her age and length of business operation
- 50% reduction (Subdivision 152-C): Unlike the other SBE CGT concessions, this concession does not impose additional requirements. If Gina is eligible for the Small business concessions, then this is automatically passed and would, therefore, reduce Gina’s $499,995 gain by a further 50% to $249,998.
- Retirement exemption (Subdivision 152-D): This concession would allow Gina to disregard all or part of the $$499,995 (or $249,998 after applying the 50% reduction) if the proceeds from the sale of her business were used to fund her retirement. There are further rules and guidelines around this, for example, it does not necessarily mean that Gina must retire from the business. There is a lifetime limit of $500,000 that can be contributed to super in this way and these contributions do not count toward annual concessional and non-concessional contribution limits.
- Rollover relief (Subdivision 152-E): The final concession allows Gina to rollover (or defer) paying the tax on the capital gain of $499,900 capital gain to a later date. This concession could be used in circumstances such as a “genuine restructure” of a small business on or after 1 July 2016. Alternatively, Gina could invest the funds in buying or stating up a new business.
The above concessions are very generous and as such, they are subject to scrutiny by the ATO to ensure only those who are eligible, have access to them. It is imperative to consult an advisor to work through the complexities of key definitions and the eligibility criteria.
If you are looking to sell or have outgrown your current business structure and are considering a restructure, please contact John Scott on 0409 402 070 for a free consultation and to explore your possible eligibility for such concessions.