Welcome back to our series on small business CGT concessions. In the second part of this series, we’ll take a closer look at three key concessions: the 15-year exemption, active asset reduction, and retirement exemption. These concessions are specifically designed to assist small business owners in reducing their capital gains tax (CGT) liabilities, allowing them to maximise their profits and plan for retirement and/or renewal. Let’s delve into each of these concessions and explore how they can benefit small business owners.
The 15-Year Exemption:
The 15-year exemption is a valuable CGT concession that provides small business owners the opportunity to disregard capital gains if they’ve owned an active asset for 15 years or more and are retiring at the age of 55 or above. It allows them to sell their asset without incurring any capital gains tax.
Example: John’s Family Business
John has been running a family business for over 20 years and has made the decision to retire as he is over the age of 55. He decides to sell the business, including the property and all associated assets. Assuming John has met all necessary conditions incidental to utilising the 15-year exemption, John can exclude the capital gains from the sale, enabling him to maximise his retirement funds.
The Active Asset Reduction:
The active asset reduction concession allows small business owners to reduce their capital gain by 50% when selling an asset used in an active business for at least half of the ownership period. This concession provides significant tax relief for those selling assets closely tied to their business operations.
Example: Sarah’s Photography Studio
Sarah owns a photography studio and decides to sell the photography studio after using it exclusively for her business for six years. Since the studio qualifies as an active asset, Sarah can apply the active asset reduction. This reduces her capital gain by 50%, resulting in a lower tax liability and preserving more of her post-sale profits.
The Retirement Exemption:
The retirement exemption allows small business owners to exempt or defer capital gains when the sale proceeds are contributed to a complying superannuation fund or retirement savings account. It provides flexibility and tax advantages for business owners planning for retirement. The key distinction with this concession relative to the 15-year exemption is you are not required to retire subsequent to the transaction which is a major advantage for younger business owners in earlier stages of their career.
Example: Mark’s Business Sale and Superannuation Contribution
Mark decides to sell his business and contribute a portion of the sale proceeds to his superannuation fund. Assuming Mark has met all necessary conditions to utilise the retirement exemption, Mark has the option to either fully exempt the capital gains or portion of it by allocating proceeds to his complying superannuation fund. This allows Mark to strategically manage his tax obligations and optimise his retirement savings.
The 15-year exemption, active asset reduction, and retirement exemption are powerful concessions that small business owners can utilise to minimize their capital gains tax liabilities. These concessions provide opportunities for maximising retirement funds, reducing tax burdens, and preserving profits. It’s important to consult the Australian Taxation Office (ATO) resources or seek advice from a tax professional to ensure proper compliance and guidance when applying these concessions.
In the next part of our series, we’ll explore two additional concessions: the small business rollover and the small business restructure rollover. Stay tuned for more insights and practical examples that will help you navigate these concessions effectively. Remember, understanding the specific requirements and eligibility criteria is essential to make informed decisions and optimise the benefits of these concessions for your small business.
