Basic conditions
The following basic conditions must be met.
- Business turnover (income before expenses) is less than $2M per year.
- Maximum net asset value must not exceed $6M (assets less liabilities). This by definition includes the value of the asset sold.
- The asset is active business asset. Examples include: business premises, intellectual property, goodwill, agricultural land.
The asset sold can also be passively held and used in a closely connected small business. The most common example of this situation is the family farm for which the farming activity is conducted within say a company or family trust.
4 small business concessions
15-year exemption
No tax will be payable on your capital gain if:
- You have continuously held the asset for 15 years or more.
- You are 55 years or older and retiring, or are permanently incapacitated.
This is the golden ticket of capital gains tax (CGT) concessions. The result is that your taxable capital gain is reduced to Nil.
50% active asset reduction
If you missed out on the golden ticket, it is not all bad.
This concession reduces the taxable capital gain by half. The asset must have been actively used for at least half of the ownership period.
The general discount (subject to the 12-month rule) can be used in addition to this, which reduces the taxable value by half again, meaning that only 25% of the capital gain is taxed.
Retirement exemption
After applying the active asset reduction and general discount, you can then choose to use this concession to disregard the remainder of your capital gain, up to a lifetime limit of $500,000.
If you are aged 55 years or older, nothing more needs to happen. If not, the amount disregarded must be paid into your superannuation.
Rollover
You can choose to defer your remaining capital gain by up to 2 years.
This can allow you time to purchase a replacement asset. If a replacement asset is purchased, the capital gain is deferred until the sale of the replacement asset.
If no replacement asset is purchased. The remaining capital gain is reported in your tax return 2 years after the sale.
Deferring in this way can be a planning tool to:
- Allow time to reach 55-years of age barrier so that funds do not have to be paid into superannuation.
- Or to defer reporting the capital gain until there is less other taxable income and maximising the use of lower tax rates.