Q. I am in the process of finalizing the sale of my company and plan on retiring. I established the business in 1991 and have a cost base for Capital Gains Tax (CGT) purposes of approximately $300,000. I am selling the business for $2,100,000. There is no debt on the business. I own the shares in the company with my wife 50/50 and we have a holiday home worth $600,000 and a SMSF with assets of $1,800,000. How is tax calculated on the sale of the business?
A. In determining the tax payable on the sale of the business, there are 3 basic conditions that need to be met to determine if you qualify for Small business CGT concessions.
Firstly your investment assets need to be less than the $6 million net asset test value. Assets included are the value of the business including land and buildings and your investment assets. Assets excluded are personal use assets such as your home and holiday property (provided no income is derived from this asset), Life Insurance Policies and your Superannuation.
Secondly if the net asset value is greater than $6 million but the turnover of the business is less than $2 million a year, concession can still apply.
Thirdly the assets being sold must be an active asset in a business. The criteria is met if the asset is used or available to be used in the course of carrying on a business.
So in your case you are well under the threshold and presumably meet the third test. If the basic conditions are met, there are 4 Small Business Concessions available. How to apply them and in which order will depend on your circumstances.
The first Concession is the “15 year exemption”. If you have continuously owned the business for 15 years and are over 55 and retiring, the capital gain is exempt from tax. In your case, this criteria is met and therefore you will not pay Capital Gains tax on the sale of the business.
Other concessions that could have applied are as follows:
The “50% Active Asset Reduction” applies if you didn’t qualify for the “15 year exemption”. The Capital Gain will be reduced by 50% if the asset being sold is an active asset used as part of conducting the business.
The “Retirement Exemption” exempts up to $500,000 of Capital Gain for each owner if rolled over to Superannuation prior to Retirement or taken as a lump sum on retirement. Usually you would rollover into Superannuation due to the tax benefits available inside the Superannuation system. This exemption has a lifetime limit of $500,000 and is not indexed to inflation.
Finally the “Small Business CGT Rollover relief” which confusingly does not refer to rolling the benefit into Superannuation but rather reinvesting the proceeds into another business. This concession allows you to either invest or rollover the investment into another business within 2 years of disposal.
Capital Gains are taxed at the individual’s Marginal tax rate. The tax applies to 50% of the Capital Gain for individuals. Through careful and expert planning, the impact of CGT can be significantly reduced or removed. All concessions share the basic rules but each concession has their own additional set of rules or special conditions that need to be met before the concessions apply. The concessions also need to be applied in the appropriate order so get expert advice.