Small Business CGT Concessions
The best investments for most clients are their businesses and their homes, in that order. Being in business is one of the best ways to build long term wealth fast and safely.
so...Is it Rocket science?
Most clients who become wealthy do so by owning businesses.
It works like this...
- They generate strong cash flows
- Spend less than they earn
- Save the difference, then
- Invest in other areas: first the home and then other assets, to build up a significant and diversified asset base.
It begins with the end in mind
Creating a tax efficient profile for your business is to understand that almost all capital gains on the sale of a small to medium sized business are CGT free.
This is not a tax loophole. Its deliberate tax policy, and is designed to encourage small and medium sized business people. Small businesses as a group are the largest employers in Australia, and a vital part of the Australian economy.
This is one of the reasons why building up a business is the best investment that will present to you and your family.
You can read the ATO materials on the small business capital gains tax concessions here: ATO Guide to the small business capital gains tax concessions (PDF).
SMALL BUSINESS CONCESSIONS
There are four CGT concessions available to small business. These concessions may apply to CGT events (for example, the disposal of a CGT asset) that happen after 11.45am on 21 September 1999.
Any capital gain that results from a CGT event may be reduced or disregarded under the small business concessions if you satisfy certain conditions. The four concessions are:
1) The small business 15‑year exemption: This concession provides a total exemption of a capital gain if you have continuously owned the CGT asset for at least 15 years and the relevant individual is 55 years old, or older, and retiring, or is permanently incapacitated.
2) The small business 50% active asset reduction: This concession provides a 50% reduction of a capital gain
3) The small business retirement exemption:This concession provides an exemption of capital gains up to a lifetime limit of $500,000. If you are under 55 years old just before you make the choice, the amount must be paid into a complying superannuation fund or a retirement savings account (RSA).
4) The small business rollover: This concession allows you to defer a capital gain from the disposal of a business asset for a minimum of two years. If you acquire a replacement asset or make a capital improvement to an existing asset, you can defer the capital gain for longer, until the asset is disposed of or its use changes in particular ways. Either will cause the deferred capital gain to crystallise. This means you would make a capital gain equal to the deferred gain at the time of the disposal or change in use, in addition to any capital gain made on the disposal of the replacement or capital improved asset.
How much is $500,000 CGT Tax-free?
The average Australian was worth about $330,000 in 2015, and this is the third highest average wealth level in the world.
So...$500,000 CGT-free is a lot of money.
This explains why we believe buying or starting a small business with a view to selling it at a CGT free capital gain is one of the best investment strategies available to you both you and your clients.
Starting or buying a small business should be on the checklist for discussion when thinking about building wealth.
Your business premises
If you are a small business entity and the property you sell is your business premises, you may be able to reduce the capital gain using one of four small business concessions:
- 15-year exemption: If your business has owned the premises for 15 years and you’re 55 or over and are retiring, or are permanently incapacitated, you won’t have an assessable capital gain when you sell.
- 50% active asset reduction: You can reduce the capital gain on your premises by 50%.
- Retirement exemption: Capital gains from the sale of your premises are exempt up to a lifetime limit of $500,000. If you’re under 55, the exempt amount must be paid into a complying superannuation fund or retirement savings account.
- Rollover: You can defer your capital gain until another event happens that crystallises the gain. For example, if you sell your existing business premises and buy different premises for your business within a certain period, you can defer your capital gain until the new premises are sold.
This makes business premises, such as an office, a great investment because it is highly probable that these four exemptions will combine to eliminate any capital gain on ultimate sale.
What type of business premises does it apply to?
Your business premises can be a small factory or warehouse for a plumber, a shop front for a Pilates practice, a farm for a farmer, a bigger factory for a manufacturer and so on.
It can even be a residential property if it is used for business purposes: “business premises” is a function of purpose, not architectural design.
For example, many dental, doctor, and psychology practices are based out of commercially zoned but 'residential style' properties.
The CGT small business concessions mean that any one of these investments used as business premises will generate a better after tax return for your client than an identical property not used as business premises.
HOW WE SUPPORT CLIENTS
At Aspiire we have supported business and clients who are looking to finance commercial property assets, through:
- Ensuring Debts and Mortgages are well managed and with good providers
- Ensuring financial affairs are structured effectively
- Assisting in Accounting and Taxation needs with referrals to preferred accountants
- Arrangement and recommendation of SMSF or structures to suit their situation
- Helping clients take an active approach to their investments