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Business Capital Gains Tax

Pitfalls & Possibilities

The sale of a small business can potentially provide owners with once-in-a-lifetime opportunities to access available capital gains tax (CGT) concessions.  Through these concessions it is possible to completely eliminate tax on a gain of $2million.

It is imperative to seek professional Financial Planner and Accounting/Tax advice in the planning stage of the sale, rather than waiting until the sale has happened, particularly as the tax office has advised its intention to increase the number of audits on business sales to ensure there is no incorrect claims on the available concessions.  We may be able to suggest changes to the sales contract for allocation of money that will not only reduce tax payable but also give benefits to the buyer, thereby helping secure the best sales price.

Advance planning may enable further savings by taking advantage of changes to superannuation for contributions resulting from the sale of small business and ensure you get the maximum benefit from your years of hard work.

There are four specific small business CGT concessions, in additional to the general 50% discount that applies to individuals & trusts for assets held for more than 12 months;

• A 50% gain reduction on the sale of 'active' assets used in the business (includes business premises, but only if owned by the same entity/individuals that operated the business);
• A 15-year business ownership exemption, when the owner is over 55 and the sale is in connection with retirement;
• A Lifetime $500,000 retirement exemption, when owner is over 55 or if under 55 and the gain is paid into superannuation;
• Rollover relief if a replacement asset is purchased within 1 year before the gain or within 2 years after.

For accessing any of the concessions there is a total 'net asset test' that must not be exceeded, currently set at $5million of net worth (assets less liabilities).  This includes all business assets, investment properties, shares, cash, managed funds and the like. Excluded from the threshold is the main residence, superannuation and private use assets such as cars and boats.

Six clever ideas for a small business sale

1. Aim to maximise the sale price by maximising the tax advantages for the purchaser
2. Try to reduce your capital gain to Nil by combining various concessions and the general discount
3. If you are likely to exceed the $5million net asset test for eligibility there may be scope to contribute cash savings to super, which can be made by the business or business owner
4. Consider waiting until July 2007 to sell, as the net asset test threshold goes up from $5million to $6million at that date
5. Obtain specialist advice about whether to contribute a sizable portion of the sale proceeds into super
6. Think well ahead