What Tax Concessions are there for the Sale of a Small Business?

There are four capital gains tax concessions available to small businesses:

• The 15 year exemption,

• 50% reduction for active assets,

• the retirement exemption, and

• rollover relief.

What is a Small Business?

Each of the concessions is only available where the taxpayer satisfies the small business criteria. There are four tests to be satisfied for a taxpayer to qualify as a small business:

• the net assets test, (where total net value of all business assets of the business and affiliates of the business must be no greater than $6 million;

• there must be a significant individual in the entity immediately before the disposal, i.e. must satisfy a 20% test, either directly or indirectly;

• the concession applies only to active assets (business property, goodwill etc)

• or the rollover relief to apply, the replacement active asset must be acquired during the period starting 1 year before, and ending 2 years after, the original active asset is disposed of.

An active asset does not include assets used merely to derive passive income, for example a commercial property rented to a third party.

Rollover Relief

CGT rollover relief does not depend on the age of significant individuals. This concession acts to defer the payment of capital gains tax if an active asset is sold and a replacement active asset purchased within certain time constraints.

15 Year and Retirement Exemptions

The most valuable concession is the 15 year year exemption which provides for a complete exemption from capital gains tax. However, it is only available to significant individuals who are:

• retiring, and

• at least 55 years of age or are permanently incapacitated at the time of the capital gains tax event occurring.

The business holding entity must have continuously held the active asset for a 15 year period. However, the significant individual need not be the same person for the entire time.

50% Reduction

Reduces the capital gain, on disposal of assets, by half.

The General Discount (another 50%)

These concessions can, in certain circumstances, apply in addition to the general discount of capital gains available to individuals, trusts, and complying superannuation funds.

Due to the complexities of the concessions and the vast variety of tax structures it is important to obtain advice specific to your own tax situation and use the above as a guide only. (updated article from our 2002 newsletter)