Selling a business asset – such as property (including a business premises or vacant land), business-related shares or units, or intangible assets like leases or licenses – as part of a succession strategy attracts capital gains tax, unless it was acquired before September 20, 1985.
However, depending on the circumstances, there is a range of small business CGT concessions that can reduce the tax payable on these, if you meet other basic criteria such as a turnover of less than $2 million.
Two such concessions for small businesses – the 15-year exemption and the retirement exemption – also have the benefit of being able to contribute proceeds to superannuation, up to a lifetime CGT cap which in the 2023-24 income year is $1,705,000.
As the name suggests, owning your business for at least 15 years is key to the 15-year exemption, as is being aged 55 or older and the sale being connected with your retirement.
For the retirement exemption, up to $500,000 of capital gain can be treated as tax-free if it is placed into super, although those aged over 55 could also take it as a lump-sum employee termination payment.
Tapping into other CGT concessions
If time is not on your side in relation to the 15-year exemption or retirement exemptions, other CGT concessions are available.
It’s also important to note that depending on your circumstances, you may be eligible for multiple concessions.
The 50 per cent active asset reduction allows you to treat 50 per cent of the capital gain as tax-free, meaning you are taxed only on the remaining half.
Meanwhile, the small business rollover lets you defer the capital gains from the sale of an active asset if you will be purchasing a replacement asset or improving an existing one.
This could apply, for example, if you are exiting one business to buy another, as you can attach the capital gain on the former business sale to the new active asset purchase and defer the tax liability until this is sold.
Here’s an example of how this works in practice: a couple, aged 60 and 61, sold a family business for $5 million which they bought for $1 million 10 years ago.
They are eligible to apply the 50 per cent CGT discount, which brings the taxable gain down from $4 million to $2 million.
In addition, they can apply the retirement exemption and roll over the remainder of the funds into their respective super funds (up to a lifetime limit of $1,705,000 each) and reduce their tax liability as a result of the sale of the business.
Grace Bacon is the director of RSM Financial Services Australia (AFSL 238 282), advising clients on wealth management, retirement planning and succession planning.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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