CGT exemptions
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Cliff Notes Small Business CGT Rules

Small Business CGT exemptions, here’s the Cliff’s Notes (Shortened) version of this so that you get an understanding of how it works.

If you sell a business that is classed as a small business, there’s some really, really good capital gains tax exemptions on selling this business. To be a small business, there are two rules:

  1. Less than $2 million of turnover, or;
  2. Less than $6 million dollars of net assets within your structure, excluding your family home and superannuation.

If you fit into one of those guidelines, then there’s great news regarding the Small Business CGT Exemptions

There are 4 Exemptions:

  • The15 year rule: If you’ve been in business for 15 years, we just disregard the capital gain totally, which is amazing!!.
  • Active asset exemption: If you’re selling a business, whether it be shares in a company or the business from inside a company or trust, then the actual business and the assets around it that go with it are an active asset and what that means is that we reduce the capital gain by 50%. Once you’ve looked at that, then there are three other exemptions to look at.
  • Retirement Exemption – If you’re under 55, then that retirement exemption, that remaining 50% of that gain needs to go into superannuation. If you’re over 55, you can just take it there is also a rollover exemption.
  • Active Asset Rollover – If you choose, you can roll the remaining capital gain over to a new active asset within the next 2 years. Interestingly, if you have bought an active asset in the last 12 months, then you can roll it backwards which pushes the ultimate capital gain down the track. This means that the cain from your sale now reduces the cost of the new active asset when you sell it in the future.
  • In addition to these small Business CGT Exemptions the normal CGT 50% Reduction if you have held an asset for 12 months apply if you are trading through a partnership, Trust or Sole Trader. (this is not applicable to companies)

Of course there are a couple of catches – there is a lifetime limit $500,000 on CGT, rollovers and retirement exemptions, and there’s a $1 million limit on the 15 year exemption.

That’s Small Business CGT Exemptions in a nutshell. If you own your active asset in a company, then you still have an issue when you want to get that money out of the company.

Talk to us about that because we do have some tricks up our sleeves. They involve our local friendly liquidators if you have a business owned by a company.

An example of how this works is:

  1. Check you are eligible
  2. Check if the business has been operating for 15 years and the gain under $1M = No CGT.
  3. Apply the 12 Month Rule if Eligible
  4. Apply the Active Asset Exemption
  5. Apply the Retirement Exemption or CGT Rollover or a combination of each

Example 1:

Bob sold his business for $2M, his turnover was $1.8k. The steps are:
Step 1 – Is he eligible – YES

Step 2 – Has he had the business for 15 Years – no (if yes stop there!)

Step 3 – Reduce the gain by 50% for the 12 Month Rule – Reduce by $500k, remaining gain $500k

Step 4 – Reduce the gain by 50% for the Active Asset Rule – Reduce by $250k, remaining gain $250K

Step 5 – Is Bob over 55? If yes take the gain no tax. If no, . Bob then has 3 options:

  • Option 1 – Roll the remaining $250k over in cash to his super fund
  • Option 2 – Roll the remaining $250k over into a new active asset
  • Option 3 – Pay tax on the $250k

We’ve had some really good outcomes where we have clients selling businesses within 2 years of turning 55 – they can use the rollover exemption (which buys them time), and then when they turn 55 within the time frame can use the retirement exemption.

If you’re going to sell your business, please have a chat with us before you do so to ensure we can then  delve into these small business CGT exemptions, because the rules are extremely, extremely strict, and you don’t want to get it wrong.

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