In this comprehensive guide, we will explore the intricacies of these concessions, specifically addressing the complexities that arise when dealing with multiple businesses. Let's take a look at the Capital Gains Tax (CGT) concessions you can and can not access when considering selling your business.
Selling a business often leads to significant capital gains, accompanied by substantial tax liabilities. Fortunately, there are valuable Capital Gains Tax (CGT) concessions available that can reduce your tax burden by 50% or more.
If you own multiple business you can be eligible for CGT concessions because the concessions criteria base based on a specific number of businesses. The focus is on the size (revenue) and value of those businesses instead.
So let's dive in an take a look at qualifications you need to meet in order to be eligible for the small business CGT concessions.
Revenue and asset tests
The key qualifications are referred to as the $2 million revenue test and the $6 million asset test, and they signify:
Your revenue must not exceed the threshold of $2 million; OR
Your net assets must not exceed $6 million.
These tests are conducted on a 'group basis,' encompassing the revenue or net assets of any entities or individuals linked to you, your business, or your associated businesses.
Having multiple businesses doesn’t exactly exclude you from getting access the concessions, it may indirectly cause you to be ineligible based on these criteria. It’s the value of the revenue earned by the other businesses associated with you that causes you to fail the relevant threshold tests. Or, it can be the value of the assets owned by other entities connected with you.
Here’s how it works - Case Study
Johnathan owns his own business, Byron Soap Pty Ltd, which produces soap and other personal care products. Its revenue is approximately $1.5 million per year.
Byron Soap Pty Ltd also owns 60% of Pamper Byron Pty Ltd, which is a retail store that sells some of Byron Soap’s products, as well as home decor products. Pampa Byron sells $1 million of product each year.
Byron Soap Pty Ltd’s sales contain $200,000 of sales made to Pampa Byron.
Now, Byron Soap Pty Ltd is planning to sell the personal care products business to a new owner. They want access to small business CGT concessions in order to reduce their assessable capital gain.
At present, they can’t pass the $2 million revenue test as their grouped income is $2.3 million. As Byron Soap Pty Ltd owns 60% of Pampa Byron, Pampa Byron is considered to be connected to Byron Soap Pty Ltd. Therefore, for the purposes of the small business concessions, their income is grouped.
As a result of the grouped income, Byron Soap Pty Ltd won't pass the $2 million revenue test. So now, they’re going to investigate whether or not they can pass the $6 million net asset test to access the small business concessions.
But what if the sales between Byron Soap Pty Ltd and Pampa Byron was $750,000 instead of $200,000?
If this was the case, then Byron Soap Pty Ltd could pass the $2 million revenue test. Their intercompany revenue would be removed for the purposes of the grouped revenue calculation. Therefore the total revenue on a grouped basis would be $1.75 million.
In this circumstance, Byron Soap Pty Ltd passes the revenue test, and can now investigate the other criteria that would allow them to access the small business CGT concessions.
Active asset test and other eligibility
Other eligibility criteria state that the asset, in this case, your business, must be an active asset. This means it must have been a business asset, or an asset used in the course of business, for either:
7.5 years continually; or
If owned for less than 15 years, at least half its ownership period.
Additionally, if you intend to sell shares in a company or units in a trust, there are specific modified regulations to fulfill before you can benefit from the concessions. For a more detailed discussion of these rules, you should get in touch with your financial adviser.
Small business CGT concessions and exemptions
Small business CGT concessions and exemptions come with their set of complexities. Within the scope of these concessions, there are varying rules to navigate. However, if you fulfill all the eligibility criteria, you might qualify for some of the following:
50% general discount
The 50% general discount isn't specifically a small business CGT concession. It's a general concession that applies to capital gains. Therefore the revenue test and net asset test don't need to be passed in order to access this concession.
You can receive a 50% reduction on your capital gain if:
You owned the business for 12 months or more; AND
You’re an Australian resident for tax purposes.
For many, this is the easiest way to reduce the CGT they pay on their business sale.
If you’ve owned your business for at least 15 years or more continuously, then you may be eligible to receive an exemption for the entire capital gain.
However, you can only be eligible for this exemption if you’re over 55, and the sale is in connection with your retirement.
Small business 50% active asset reduction
If you pass either the revenue test or the net asset test, you may be eligible to receive a 50% reduction to your capital gain. This is calculated after any capital losses have been applied, and once the 50% general CGT discount has been applied.
You don’t actually have to be retiring to access this exemption. Rather, money from the sale of your business is being put toward your retirement.
The retirement exemption allows up to $500,000 of your assessable capital gain to be exempt from CGT if you contribute it to your super.
If you’re under 55, this sum goes directly into your super. If you’re over 55, you have a choice. You can put it directly into your super, or take it as cash.
Small business rollover concession:
With this CGT concession, you may be eligible to disregard the entire capital gain—but only if the profit is rolled over into a replacement business asset. In this case, a new business.
This means that the initial taxable cost base of your new business gets reduced by the amount you’ve rolled over into it. This also enables you to defer the CGT you would otherwise pay now, and it's likely to be paid at a future date.
To be eligible for this concession:
You must buy the replacement business within the 12 months prior to selling; OR
Within the two years following the sale.
If you don’t purchase a new business within this time, then the capital gain then gets assessed as part of that financial year’s income.
How to apply for small business CGT concessions
The application process for accessing small business CGT concessions is generally undertaken as part of your tax return. You complete the capital gains income and schedules sections with the appropriate information, and this then discloses the concessions you’ll be using.
Some circumstances, such as the retirement exemption, does require additional documentation. In this case, you’ll need to provide the relevant documentation to your nominated super fund so they know that your contribution is in relation to this CGT concession.
We have taken a closer look at the eligibility criteria of a multiple business owner, You can indeed access the CGT concessions. Your eligibility is determined based on the combined income of your business ventures or the total assets.
The important thing is to know your numbers, to ensure you have a clear understanding of your revenue, assets, and your CGT concession eligibility.
So if you own multiple businesses, and are considering selling in the future? Don’t leave your tax planning to the last minute. Get in touch with Wealth Effect Group today to book an investment strategy session today.