Medium and small business Tax concessions
“The hardest thing in the world to understand is income tax ” – Albert Einstein
Taxation always plays an important part in any major business transaction and of course this applies to business succession planning as well. Whether the business is sold, listed, merged or transferred onto family members or employees there is always a taxation implication that needs to be carefully considered and managed.
Most likely capital gains tax will be a consideration and unfortunately of all areas of tax ( except possibly superannuation which will discussed in future post shortly ) this is probably the most complicated area of taxation law particularly in relation to the capital gains tax concessions.
Small and medium-sized business owners can potentially access one or more of up to 6 CGT concessions to reduce their potential capital gains tax liability when selling a business, if certain relevant conditions are met;
Pre or post CGT business – 20th September 1985
The general 50 % CGT discount
The small business Capital gains tax concessions ( listed below );
15 year exemption
50 per cent discount
replacement asset rollover
Again, in order to access the small business CGT concessions 2 preconditions must be met.
Firstly, the relevant asset must be an active asset which means used or is ready to use in a business carried on by the taxpayer or service certain associates. Units in a unit trust or even shares in a company can qualified active assets as long as certain conditions are also met.
Secondly either one of the following threshold must be met:
the entity is a small business entity which means it carries on a business and had an aggregate turnover of less than $2 million or
the entity satisfies the maximum net asset value test – this means that the total of the net value of CGT assets owned by the taxpayer and certain associates does not exceed $6 million.
Several amendments were introduced as at 1 July 2007 covering passively held CGT assets, CGT assets used by partnerships and handling of spouses and children as affiliates of the business owner.
These amendments potentially allow small-business taxpayers to achieve a more tax efficient outcome as well as realising important asset protection objectives by holding capital appreciating assets in separate vehicles to the business entity (again we will further examine use of self managed super funds in a future post).
In order to assure the most efficient outcome – proper structuring advice on establishment of the business, as well as comprehensive advice on sale remains critical to best access the concessions, which can in the best possible case scenario in fact eliminate tax on capital gains on restructures or sales of small businesses and assets used by small business – but again proactive advice is the key.