There are significant small business Capital Gains Tax (CGT) concessions on selling a small business that can help you eliminate or substantially reduce tax upon the disposal of business assets.
By Shadforth Financial Group
There are significant small business Capital Gains Tax (CGT) concessions on selling a small business that can help you eliminate or substantially reduce tax upon the disposal of business assets. Despite the great benefits that apply to small businesses, they are often referred to as the most complex piece of tax legislation to apply in practice. The volume of recent case law surrounding these rules highlights the fact that their application are subject to strict ATO scrutiny. Importantly, for owners and advisers, the risk of applying the rules incorrectly can be enormous, therefore, the involvement of an experienced tax practitioner in this field is imperative to achieving the best result.
For many small business owners, their business represents a major percentage of their overall wealth. On most occasions, the owner's retirement will be financed by the sale of their business. Where CGT is payable on the sale of the business assets, this will directly affect the owner's cash position upon retirement. Therefore, "sound" taxation advice is required both upon entry into the business structure and upon exit.
A range of small business CGT concessions may be available when a small business is sold. They include:
These concessions have the ability to reduce CGT to nil, on the sale of a business (or business related assets). However, to apply these concessions, intricate and complex rules need to be satisfied. Ultimately, how the rules apply will depend on the legal structure used to carry on the business. Unless "thought" is given to the implementation of the most appropriate legal structure (i.e. with regard to the future sale of the business), the owners may miss out on applying these concessions.
Broadly speaking, where an owner disposes of a business (or business related assets) and derives a capital gain, the following basic conditions must be satisfied in order to consider applying the small business CGT concessions:
In addition to the above, where owners of a business dispose of shares in the operating company or interests in an operating trust (rather than the business operating assets), further onerous and complex conditions are required to be met in order to apply the small business CGT concessions. In general this includes:
Notwithstanding the above complexity, when applying each of the specific small business CGT concessions, further rules are required to be met.
The rules governing the small business CGT concessions have changed on numerous occasions since originally being introduced on 21 September 1999 (and will most likely change in the future). As a result, businesses that were originally structured with the concessions in mind, may find they no longer qualify for them. An example of this is where appreciating assets (such as land and buildings) are held by a passive holding trust whilst the business is carried on by a separate trading trust.
Prior to the change in the definition of "affiliate", such an arrangement may have been appropriate in applying the concessions (on the basis that both trusts were acting in "concert with" each other) where the land and buildings were sold. However, the current definition of "affiliate" does not specifically refer to a trust estate. Therefore, under the current drafting of the rules, both trusts may need to be "connected with" each other (which requires a common 40% control test to be satisfied).
When owners are commencing or purchasing a business, one of the most important decisions is to adopt an appropriate business structure. Due consideration must be given towards the ability to gain access to the small business CGT concessions as part of the structuring process and the owner's exit plan.
Accordingly, for business owners, it is imperative to obtain expert advice when setting up business structures and when exiting a business. Importantly, the cost of applying the small business CGT concessions incorrectly can be enormous, that is paying tax on the entire capital gain vis-à-vis paying nil tax.