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Understanding the small business Capital Gains Tax concessions

Chris Colman
Wealth Adviser
10 Apr 2024

Delving into the realm of small business transactions unveils the intricate landscape of Capital Gains Tax (CGT) concessions. These concessions allow you to reduce, disregard or defer some or all capital gains from an active asset used in a small business. Once owners of a small business decide it’s time to sell, knowing the rules around CGT becomes paramount, potentially offering a pathway to circumvent tax liabilities and channel proceeds into superannuation accounts. For a lot of retirees or those approaching retirement, the prospect of funnelling a substantial sum into super presents a transformative opportunity through increased income generation which can pave the way to an enhanced quality of life.

Firstly, the ATO have detailed some basic eligibility conditions for any of the CGT concessions and should you qualify, the concessions can be lucrative. Broadly speaking, the parameters include: a capital gain must arise on disposal of the asset; either the business turnover is less than $2 million, or the net value of your assets and the assets of relevant associated entities is less than $6 million; and the asset disposed must be an “active asset”.

There are four small business CGT concessions to consider when selling a business, should you be eligible.

(1) The 15-year exemption is the most valuable as it allows a full exemption from CGT on the sale of the business, or “active asset”, if it has been owned for 15 years, and if the owner is over 55 and about to retire or is permanently incapacitated. The lifetime CGT cap is $1.705 million, and it’s indexed annually.

(2) The 50 per cent reduction allows an extra 50 per cent reduction in the capital gain. This is in addition to the usual 50 per cent CGT discount available for individuals. For example, if you were to sell land used in a business that results in a net capital gain of $100,000. Should you have owned the land for more than 12 months and meet the basic eligibility conditions, you can use the 50 per cent CGT discount to reduce the capital gain to $50,000. After using the small business 50 per cent active asset reduction, it’s further cut to $25,000.

(3) If you don’t qualify for the 15-year exemption, another concession is the retirement exemption – a $500,000 reduction in the assessable capital gain. The $500,000 is a lifetime limit for each individual, and if under 55, the amount must be paid into superannuation. If over 55, it is optional to pay the amount into superannuation.

(4) The final concession is the rollover concession, which allows the capital gain to be rolled over into another active business asset. If no asset is acquired after two years, then the capital gain arises again at this point. The retirement exemption can be applied to this capital gain which can mean a two-year deferral to contribute to superannuation or to turn 55.

Selling a business requires planning, due diligence and careful negotiation. Getting it right often means seeking expert legal and tax advice to capitalise on any concessions offered by the ATO.

Outside of the above, there are several other ways to boost superannuation, subject to being eligible to contribute concessional or non-concessional amounts. Utilising forward non-concessional contributions means each member can bring forward their non-concessional contributions for three years to contribute $330,000 each, or $360,000 each after 1 July 2024.

There are also catch-up concessional contributions, where members who have balances less than $500,000 can carry back unused concessional contributions for the previous five years to obtain a larger tax deduction in the contribution year.

If any of the above applies to you and you are eager to optimise your financial situation, consider talking to one of Hewison Private Wealth’s many experienced Financial Advisers today. Contact us  HERE.