No two investments are the same and this is highlighted when we talk about capital gains tax. There are several small business capital gains tax (CGT) concessions that owners must be aware of before they consider selling their commercial property or any assets used by the business.
In this article we will look at:
- What is capital gains tax?
- Small business and CGT
- Basic conditions of the small business capital gains tax concessions
- The small business CGT concessions
- 15-year exemption
- 50% active asset reduction
- Retirement exemption
- Capital gains tax and depreciation for small businesses
What is capital gains tax?
When you sell any investment, you need to pay a tax on the capital gain made from that sale. This tax is called capital gains tax, or CGT.
Any income-producing asset such as property, a business vehicle or shares will have an assessable capital gain if they sell the asset at a profit. This capital gain is used to calculate the payable CGT by the business or individual for the same financial year.
Small business and CGT
The Australian commercial industry encompasses many small businesses. The Australian Taxation Office (ATO) recognises that small businesses are in a unique position, in comparison to larger companies. This results in four small business CGT concessions for any asset the business owns and eventually sells, including property.
Basic conditions of the small business capital gains tax concessions
Before we cover the concessions, it’s important to understand the four key steps involved in determining whether the asset’s owner meets the basic conditions set out by the ATO. If the owner meets the conditions, the small business concessions will apply for the CGT event of the asset.
The four steps look at several factors such as the aggregated turnover of the business, whether the asset is an active asset as determined by the ATO, if the asset in question is a share in the business or trust and conditions around membership interests in a partnership. Each step must also be considered in their set order.
The requirements for each test can be complex, and we always recommend that small business owners consult with their accountant to determine whether they meet each step.
The small business CGT concessions
Once the basic conditions are met, the owner can apply any relevant small business CGT concessions to the sale of the asset in question such as property or any other asset the business owns for operations.
When a small business has owned an active asset for 15 years and the owner is aged 55 or over, retiring or permanently incapacitated, any capital gain is exempt from CGT.
If the 15-year exemption is met, any need to assess a capital gain is totally removed and the owner won’t need to apply for further concessions.
50% active asset reduction
If the small business is not eligible for the 15-year exemption and still meets the basic conditions, they may look to active asset reduction.
Small businesses can reduce the capital gain on an active asset by 50 per cent. If eligible, this can be applied on the remaining value once the capital gain has had any capital losses offset and the 50 per cent CGT discount applied.
The retirement exemption can be used in addition to or instead of the 50 per cent active asset reduction if certain conditions are met. Under this exemption, capital gains from the sale of active assets are exempt up to a lifetime limit of $500,000.
However, if the small business owner is under 55, the exempt amount must be paid into a complying super fund or retirement savings account.
A small business can defer all or part of a capital gain from the sale of an active asset for two years or longer if; they acquire a replacement asset or incur expenditure on making capital improvements to an existing asset.
Further CGT events can happen if certain conditions are not met by the end of the replacement asset period. There are many intricacies of CGT events, and we recommend consulting with your accountant as only they can provide advice on CGT events.
Capital gains tax and depreciation for small businesses
When a small business owner owns their commercial property and they claim property depreciation, it can impact their cost base. Given that the property’s cost base is used when calculating any capital gain made from a sale, this can increase the payable CGT.
All small businesses that either own the property or are a tenant can benefit from thousands in depreciation deductions. Unlike residential tenants, commercial tenants can claim depreciation on any fit-out they install. Common examples include carpet, desks and shelving.
BMT Tax Depreciation has completed thousands of tax depreciation schedules for all types of commercial properties. BMT understands that every property is different and has helped thousands of small business owners maximise their cash flow with depreciation deductions.
For more information on commercial property depreciation, contact the expert team at BMT on 1300 728 726 or Request a Quote.