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Tax on the sale of a small business / Налог при продаже малого предприятия / Падатак пры продажы малога прадпрыемства


Smart Tax Bulletin
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The Exit Plan: Winding Up Your Business – Part 

3
Wednesday, 23rd April, 2014, by Channa Perera
In today's Smart Tax Bulletin:
  • CGT tax concessions when selling a small business
Dear Reader,

In last week’s edition of the Smart Tax Bulletin, I brought you 4 CGT-related issues when you wind up your business. As promised, today I will explain some of the CGT tax concessions that you can use to either minimise or exclude the taxable capital gain that otherwise arise when selling a business.

Many of you have put years of heart, sweat and tears into building and running a business. So you deserve the best reward when you sell. Well, fortunately for you some important CGT concessions may be the key in getting that reward, regardless of the intricacy that surrounds the concept.

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4 CGT concessions available to small business
In order to simplify things I have identified the following four concessions that are available to small business owners:
  • Small business 50% discount
  • 15 year exemption
  • Replacement asset rollover
  • Retirement concession
Your eligibility for the above concessions will depend on fulfilling the following two criteria;
  • annual turnover of the business must be less than $2 million; or
  • net assets less than $6 million (excluding the family home and super benefits).
Pre or post CGT Business?
Before heading into detailed descriptions of the above concepts, it is important to identify whether your business commenced before 20 September 1985 (CGT was a part of the tax reform introduced by the Hawke/Keating government in Australian on 20 September 1985).
Pre-CGT Assets
Any assets (either business or personal) purchased before this date is CGT-exempt – you don’t pay the government anything. Meaning that you get to keep any capital gains/profits without having to pay any tax.
Post-CGT Assets
Any assets purchased after 20 September 1985 are subjected to CGT.  Click here to find a list of CGT exempt items from the ATO website.
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And now back to the 4 CGT concessions available to small business…
1. Small Business 50% Discount
The sale of a small business will attract a CGT concession of 50% straight away, if you satisfy all of the following criteria;
  • the selling price should be less than $5 million;
  • the business was trading at the time of sale;
  • the business must have held assets for more than 12 months; and
  • the business must be owned by an individual;
Note: Individuals who are entitled to both the general discount and the small business 50% reduction, can have their assessable capital gain reduced by 75% - now that’s a massive saving.
2. 15-year Exemption
The 15-year exemption is the most generous concession of them all, which grants the full exemption of any CGT payable on the disposal of an asset.
But there’s a catch here! In order to be eligible:
  • you should have held the asset for at least 15 years;
  • either you should be over 55 years old; or
  • be permanently incapacitated; or
  • in your retirement;
If you satisfy the requirements for this concession, you cannot apply for more CGT concessions as this grants you a total exemption for the whole gain.
If you qualify for the above concession and have made a capital gain through the sale of a business asset, you have the option of contributing the proceeds from that sale into a superannuation fund of your choice, subjected to a non-concessional cap (for lifetime limit) (for CGT) of $1,255,000 for 2012/2013.
3. Replacement Asset Rollover
If you decide to go with this concession, you have the option of investing the net capital gain into another business.
Tip: If you are under 55 years old, you can continually differ the CGT liability until you hit 55.
In order to be eligible for this concession, you must satisfy the following requirements:
  • you must invest the capital gain in another business between 1-2 years after the sale of the business; and
  • if the new business is a company structure, you must buy a controlling interest in the company.
4. Retirement Concession
If you satisfy the following conditions, then you might be eligible for the retirement concession;
  • if the seller is over 55 years of age and intends to retire;
  • if the business assets have been owned for more than 15 years
  • if the annual turnover is less than $2 million; and
  • if net assets are less than $6 million excluding the family home and any super benefits.
However, the sum of the gains able to be disregarded under this concession will be subjected to a life limit of $500,000.
Tip: The requirement to satisfy the top two points above can be disregarded, if they;
  • are under 55 years old; and
  • contribute the gain (or equal to the gain) to a complying super fund as a CGT cap contribution.
Tip: In doing so they stand to reduce the lifetime CGT cap amount of $1,255,000, even though the maximum contributions allowed under this concessions is $500,000.
Keep in mind that the liability for CGT on the sale of a small business arises, when a contract is signed and not when it settles.

The CGT concessions available for genuine small business owners is so generous, that (if well advised) you could end up either having no CGT liability or a CGT liability that you can defer to a future date at which time it may be eliminated.
Thanks for reading and see you next week,
c
Channa Perera
Editor
Smart Tax Bulletin




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Capital gains tax

Exemptions

There are some capital gains you can disregard (that is, you do not have to include them in your assessable income) and some capital losses you must disregard (that is, you can’t use them to offset a capital gain and therefore reduce your assessable income).
Some of the more common exemptions include capital gains or capital losses for:
  • your main residence (but there are some exceptions)
  • your car (that is, a motor vehicle designed to carry a load of less than one tonne and fewer than nine passengers), motorcycle or similar vehicle
  • pre-CGT assets (assets you acquired before 20 September 1985, when tax on capital gains came into effect) with the exception of some pre-CGT shares in private companies, or pre-CGT interests in private trusts, where a combination of factors can occasionally trigger a CGT event giving rise to a taxable capital gain
  • some collectables and other items for personal use  
  • depreciating assets used solely for taxable purposes
  • a decoration awarded for valour or brave conduct, unless you paid money or gave any other property for it
  • CGT assets used solely to produce exempt income or some types of non-assessable non-exempt income
  • shares in a pooled development fund
  • compensation or damages you receive for any
    • wrong or injury you suffered in your occupation
    • wrong, injury or illness you or your relatives suffered
     
  • gambling, a game or a competition with prizes
  • payments made under the German Forced Labour Compensation Programme (GFLCP), and certain payments or property received by Australian residents as a result of persecution during the Second World War
  • reimbursement or payment of your expenses under the following
    • Unlawful Termination Assistance Scheme
    • Alternative Dispute Resolution Assistance Scheme
    • M4/M5 Cashback Scheme
    • a scheme established by an Australian government agency, a local government body or foreign government agency under an Act or other legislative instrument (for example, regulations or local government by-laws) – ‘expenses’ in this context does not include a payment for the loss, destruction or transfer of an asset
     
  • a payment or grant under prescribed industry re-establishment or exit grants (for example, the dairy, sugar and tobacco industry exit programs)
  • some things you inherit
  • your rights in relation to a superannuation agreement (as defined in the Family Law Act 1975), being created or ended
  • the transfer of a super interest in one small super fund to another small super fund on the breakdown of the relationship between spouses or former spouses
  • a CGT event happening to the segregated current pension asset of a complying super fund
  • some payouts under a general insurance policy, life insurance policy or annuity instrument
  • a CGT asset that is your trading stock at the time of the CGT event
  • your share of certain profits , gains or losses arising from disposal of investments by a venture capital limited partnership (VCLP), an early stage venture capital limited partnership (ESVCLP) or an Australian venture capital fund of funds (AFOF) (see the publication Venture capital tax concession: overview)
  • a financial arrangement where gains and losses are calculated under the TOFA rules
  • some types of testamentary gifts.

Main residence

A capital gain or capital loss you make from a CGT event relating to a dwelling that was your ‘main residence’ (your home) is generally exempt. However, the exemption depends on how you came to own the dwelling and what you have done with it – for example, whether you have rented it out at any time, including having a lodger (seeSelling your home).

Collectables

Collectables include the following items used or kept mainly for the personal use or enjoyment of you or your associates:
  • paintings, sculptures, drawings, engravings or photographs; reproductions of these items; or property of a similar description or use
  • jewellery
  • antiques
  • coins or medallions
  • rare folios, manuscripts or books, and
  • postage stamps or first day covers.
A collectable is also:
  • an interest in any of the items listed above
  • a debt that arises from any of those items, or
  • an option or right to acquire any of those items.
You disregard any capital gain or capital loss you make from a collectable if any of the following apply:
  • you acquired the collectable for $500 or less
  • you acquired your interest in the collectable for $500 or less before 16 December 1995, or
  • you acquired an interest in the collectable when it had a market value of $500 or less.
If you dispose of individual collectables that you would usually dispose of as a set, you are exempt from paying CGT only if you acquired the set for $500 or less on or after 16 December 1995.
Capital losses from collectables can be used only to reduce capital gains (including future capital gains) from collectables. As is the case with any capital loss, there is no time limit on how long you can carry forward a net capital loss from a collectible.

Personal use assets

Personal use assets are CGT assets, other than collectables, used or kept mainly for the personal use or enjoyment of you or your associates. Any personal use asset you acquired for less than $10,000 is disregarded for CGT purposes.
Personal use assets include:
  • boats
  • furniture
  • electrical goods
  • household items.
A personal use asset is also:
  • an option, or a right, to acquire a personal use asset
  • a debt resulting from
    • a CGT event involving a CGT asset kept mainly for your personal use and enjoyment
    • you doing something other than gaining or producing your assessable income or carrying on a business (for example, making a private loan to a family member or friend).
     
Assets that are not considered to be personal use assets include:
  • land and buildings
  • shares in a company
  • rights and options
  • units in a unit trust
  • leases
  • convertible notes
  • your home
  • foreign currency
  • goodwill
  • contractual rights
  • any major capital improvement made to certain land or pre CGT assets.
If you dispose of personal use assets individually that would usually be sold as a set, you get the exemption only if you acquired the set for $10,000 or less.
All capital losses you make on personal use assets are disregarded. This means you cannot use capital losses on personal use assets to reduce your capital gains on other personal use assets.

Depreciating assets

CGT does not apply to depreciating assets you use solely for taxable purposes. Gains (or losses) made on these assets are treated as assessable income (or claimed as deductions). Such assets may include business equipment or fittings in a rental property. However, if you have used a depreciating asset for a non-taxable purpose (for example, used it for private purposes) the CGT rules apply.