April 13, 2021
Capital Gains Tax and My Small Business
It’s every small business owner’s nightmare. You work hard building up a business from scratch, over the years. Often you sacrifice your own salary to keep the business going. Then you decide to sell off an asset or exit the business entirely, only to be hit with a bill for Capital Gains Tax (CGT).
Capital gains are treated as a different form of income by the ATO. It’s quite separate to ordinary income generated from day-to-day business profits. Taxes on capital gains are triggered when a capital asset is sold. Capital assets are commonly part and parcel of the sale of a small business.
How Capital Gains Tax Is Calculated
Capital Gains Tax is a form of taxation levied on all profits realised on the sales of business assets and on shares of a company held by shareholders. If your small business owns an asset, you are only liable for Capital Gains Tax when you sell that asset at a profit.
The simplest way to calculate the capital gain is to take the selling price and then subtract its original cost and other associated expenses. In practice its more complicated than that and is very dependent on the type of asset sold.
Capital gains on assets held for less than a year are taxed at the standard rate of tax, being 30% for companies or 26% if a small business and at marginal rates for individuals. If the asset is held for more than 12 months then a general 50% discount is available for individuals. This general 50% discount is not available to companies.
Selling A Capital Asset
Capital Assets are deemed to be a form of property held by a company for commercial business operations or for investment purposes. Capital assets typically comprise those assets employed by the business to generate a profit from its operations.
Most types of business assets and property are classified as capital assets. This includes:
- Intellectual property including trademarks, patents or copyrights
- Vehicles, plant and equipment used in the day-to-day operations of your business
- Land and buildings used in your business’ operations
- Investments, including stocks and bonds, that generate an income over time
Note: Types of business property that do not fall within the definition of capital assets are raw materials and the owner’s personal property.
Selling A Non-Capital Asset
Some commercial sales involve only the sale of a specific business asset. In these instances, no property, buildings or an existing customer base are sold. In this instance, if you sell a normal business asset such as company vehicles, second-hand furniture and fixtures or equipment, the profit from the sale of these assets is deemed to be an ordinary gain. That is, the profit is treated as the business’ ordinary income, not as a capital gain.
Small Business CGT concessions
Happily, some relief from Capital Gains Tax is available to small business owners. These comprise four small business CGT concessions approved by the Federal Government that are available to small business owners to reduce any CGT attributable to the sale of business assets.
As long as you meet the specified conditions, you can apply for as many concessions as you qualify for until your CGT liability is zero.
The CGT concessions available are:
1. Small Business 15-Year Exemption
If you are aged 55 years or over and are retiring, no assessable CGT is triggered when you sell a capital asset providing the business has owned it for 15 years. This provision is also available if you become permanently incapacitated.
2. Small Business Retirement Exemption
If you sell your small business to retire, according to the ATO, “the capital gain from the sale of your business asset will be exempt up to a lifetime limit of $500,000.” If you happen to be less than 55 years of age, you must direct the exempt amount into a complying retirement savings account or superannuation fund and you don’t actually have to retire whatever age you are!
3. Small Business 50% Active Asset Reduction
This exemption enables you to reduce the capital gain on an active asset by 50 per cent in addition to the 50 per cent CGT discount if you’ve owned the capital asset for twelve months or more
4. Small Business CGT Rollover
Small business owners are also eligible for a CGT rollover. Under these provisions, if you sell an active asset and become liable for CGT, you may defer all or part of the capital gain made from the sale, for up to two years.
This deferral assumes you acquire a replacement asset or if you incur expenses attempting to improve an existing asset. You will not be required to pay the outstanding CGT until your gain outweighs your expenses.
Hence, you can effectively offset your CGT when you sell an asset, providing you invest in another asset.
Capital Gains Tax needn’t become your recurring nightmare. By understanding how the ATO calculates Capital Gains, you find you qualify for one of the four CGT concessions and the timing are key. Always consult a qualified accountant to clarify your CGT liability.