Ask Janne: Reducing the Tax on my Business Sale
I am 63 years old and have decided to retire. I have a small business which I started over 20 years ago and it is now my largest asset – it is worth even more than my house in Forestville. I am concerned that I will lose a lot of the value of my business when I sell. Do you have any ideas on how to reduce tax on the sale of my business?
Regards, Alan, Forestville.
Congratulations on such a long career in your own business! Very few businesses last that long. One of the great advantages of a small business is the value of the asset that you create over time. For many people, this is a de-facto form of retirement saving, and often either replaces or enhances the traditional form of retirement saving: superannuation.
Fortunately, this has been accepted by the Australian government since 1999 and consequently there has been legislation to limit the amount of capital gains tax (CGT) that is paid on the sale of a small business. This is known as the Small Business CGT Concessions. The Australian Tax Office (ATO) recently estimated that only 10 per cent of people eligible for the concessions actually claimed them. This is a gross overpayment of tax on the part of small business owners.
It is important to note that these concessions apply only to the sale of an active asset, i.e. it must be a business rather than an investment. For example, an investment property would not qualify for the concessions.. There are two initial tests to determine whether you qualify for Small Business CGT Concessions:
Does your business turn over less than $2,000,000 per annum?
Are your total assets (excluding your principal residence and superannuation) less than $6,000,000?
It is important to know that by qualifying under either one of the above questions is sufficient. A farm is a good example as these are typically of high value but with fairly low turnover. So if you had a farm turnover of say, $1,300,000 and you sold your farm for $9,000,000 you may qualify, as your turnover is less than $2,000,000.
There are four separate concessions:
15 year exemption
50 per cent active asset reduction
15 Year Exemption
Alan, you may qualify for the 15 year exemption. To qualify, you must have owned the business for 15 years or more, be over 55 and retiring. You must also be selling an active asset and qualify under one of the points above. If so, the sale of your business may be capital gains tax free. It is important to note that you must have held the business in the same entity for the 15 years, i.e. if you had seven years as a sole trader and 13 years as a Pty Ltd then you will have to wait until you have completed 15 years as a company to qualify for this concession.
Active Asset Reduction
You can reduce the capital gain on an active asset by 50 per cent. This is in addition to the 50 per cent CGT discount if you've owned the asset for 12 months or more.
Capital gains from the sale of active assets are exempt up to a lifetime limit of $500,000. If you're under 55 years of age, the exempt amount must be paid into a complying super fund or a retirement savings account.
If you sell an active asset, the small business rollover allows you to defer all or part of a capital gain for two years, or longer if you acquire a replacement asset or you incur expenditure on making capital improvements to an existing asset.
This is an extremely complex piece of legislation. There are more benefits and more rules that I have not listed here. It is essential that you obtain professional advice before you sell your business. Please contact your financial planner of call me on 9452 7871.
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
Plan Protect Pty Ltd
Phone: 02 9452 7871
Address: 14 Rodborough Rd, Frenchs Forest.
Authorised Representatives, Godfrey Pembroke Limited
Australian Financial Services Licensee
105-153 Miller Street, North Sydney