Well the answer is, that it depends. The one constant that remains however is that if you are considering selling either your business or your business assets, you should consult with an experienced adviser to find out.
In addition to the general Capital Gains Tax (“CGT”) exemptions and rollovers that are available more widely; there are a number of generous concessions targeted specifically at small business. These are generally referred to as the Small Business CGT Concessions.
The most common situation where the Small Business CGT Concessions can be applied is on the sale of a business (i.e. goodwill). However, the concessions can also be used when disposing of one or more other active business assets, or even when the entity that owns the business is disposed of. It should also be noted that once accessed and applied effectively, the concessions can substantially reduce or defer any tax payable, or in some cases even reduce any tax payable to nil.
What are the Downsides?
The first main downside of the Small Business CGT concessions is that the rules are quite complex, with a number of conditions that must be met. As a consequence, there is generally plenty of scope to get it wrong. The second main downside is that, due to both the complexities of the rules and generous tax savings on offer, transactions to which the concessions are applied may be subject to increased risk of Australian Tax Office (“ATO”) review or audit. It is therefore imperative that your professional adviser is able to understand these concessions effectively.
Accessing the Concessions
The starting point for accessing the Small Business CGT Concessions is to determine whether the basic conditions common to all of the concessions can be satisfied.
The two basic preconditions that must first be satisfied are:
1. There must be CGT event relating to a CGT asset; and
2. The CGT event must, apart from the concession, result in a capital gain.
Once the above preconditions have been satisfied, there are an additional two or three (depending on the circumstances) access conditions that must also be satisfied:
1. The entity must be a small business entity or the net value of the assets that the entity and related entities owns must not exceed $6 million (known as the Maximum Net Asset Value Test);
2. The CGT asset must be an active asset; and
3. Additional CGT concession stakeholder condition, which must be satisfied if the CGT asset is a share in a company or an interest in a trust (beyond the scope of this article).
Satisfaction of the above basic conditions allows some of the concessions to be utilised without further analysis, whilst the remaining concessions require some additional criteria to be met.
Small Business Entity
As part of the Government’s 2016 Federal Budget they announced that they intended to increase the turnover threshold for small business entities from $2 million to $10 million. The provisions to enact this change have been included in the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016, which was before parliament as at the date of writing.
It should however be noted that the proposed increase to the small business turnover threshold is currently not intended to be applied for those applying to certain CGT concessions; therefore it is likely that the $2 million turnover threshold will continue to apply for the purpose of applying the Small Business CGT Concessions access conditions.
The Maximum Net Asset Value Test
It is important to note that when you are calculating the net CGT assets for yourself and certain entities, all of your CGT assets (subject to some specific exclusions) are included in the test, and not just your business assets. Some notable specific exclusions are your home, provided that it has not been used for income producing purposes, your superannuation, personal use assets and life insurance policies. Holiday homes being personal use assets would therefore be excluded, provided that they are not used for income producing purposes.
We often get clients coming to us after their previous advisers were ‘tripped up’ by the following areas:
The family home being held in a Trust
Mortgage offset accounts attached to excluded property assets
Incorrectly determining affiliates and connected entities
Obtaining ‘faulty’ valuations to support market values, particularly those relating to business goodwill and unique active business assets
Using the wrong ‘time of the event’ to calculate market values
Using excluded liabilities in the calculation. Most commonly we see liabilities with no direct connection to an asset being used or liabilities directly related to excluded assets being used
Not having an effective strategy to deal with unpaid present entitlements (“UPEs”) prior to the release of Taxation Ruling (“TR”) 2015/D2
So in conclusion, the sale of your business or business assets might very well be tax free; however it is imperative that you first consult with an experienced adviser to find out. Here at WMS we have both the knowledge and experience to help you navigate the Small Business CGT concessions. We also care enough to understand our clients, and can therefore assist you in developing an effective wealth management strategy.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.