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Capital Gains Tax - Small Business Concessions

What is Capital Gains Tax :

Capital gains tax (CGT) is not a separate tax but the amount of income tax that you pay on any capital gain that you make. A capital gain or capital loss is made when certain events or transactions happen. These are called CGT events. The most common CGT assets are land, buildings, shares in a company, and units in a unit trust. Less well‑known CGT assets include contractual rights, options, foreign currency, leases, licences, and goodwill etc.

In general, you make a capital gain if you receive an amount from a CGT event (such as the disposal of a CGT asset) that is more than your total costs associated with that event. You make a capital loss if you receive an amount from a CGT event that is less than the total costs associated with that event. You can use a capital loss only to reduce a capital gain, not to reduce other income. You can generally carry forward any unused capital losses to a later income year and apply them against capital gains in that year.

 

Active Asset Rollover Small Business CGT Exemption

This topic covers the condition of active asset CGT concession/exemption rollover for Small Businesses. Before getting in to the main topic, let’s take a look of the definition and the conditions that need to be satisfied.

CGT (Capital Gains Tax) is a tax that implies where the current market price is higher than cost price, on the event of selling assets. There is also Net Capital loss that can be deferred, where the current market price is lower than the cost price on the event of selling assets.

Due to the nature and the purpose of the asset, CGT can be classed as exempt, rollover or concession. There are basic conditions that need to be satisfied in order to apply these three classifications.

  1. You need to satisfy at least one of the following conditions:
    1. You are a small business entity
    2. You do not carry on a business; other than as a partner, but your private asset is used by an affiliated business entity
    3. You are a partner in a partnership that is a small business entity and the asset is used or in the interest of partnership’s asset
    4. You satisfy the maximum net asset value test, which doesn’t exceed $6 million 
  2. The asset must satisfy the active asset test. In other words:
    1. It must be active for at least 7.5 years if owned for more than 15 years, and half of the period of ownership if owned for 15 years or less
    2. The asset can be a tangible asset (e.g. land or building) or intangible asset (e.g. goodwill or copyright)
    3. For a CGT asset that is a share in a company or interest in a trust, the company needs  to satisfy the 80% test for the share in a company or interest in a trust to be considered an active asset
    4. Unfortunately a CGT asset that attracts rental income is unqualified 
  3. In the case of a share in a company or interest in a trust, there are conditions that need to be satisfied before the CGT event:
    1. You must be a CGT concession stakeholder in the company or trust, or
    2. The entity owns the share or interest must satisfy the 90% test 
  4. You must keep a written record of the amount you have chosen for the exemption

Please note that the conditions listed above are the basic conditions that must be met and additional conditions will be applied depending on individual circumstances.

Now, let’s get into our main topic ‘active asset CGT concession/exemption rollover for Small Businesses’.

Capital gain from asset disposal can be deferred/rollover for a maximum of two years due to the concession. The replacement of the asset or capital improvement of an existing asset will be recognised on changing of the circumstances causes the gain to crystallise.

Rollover allows you to defer the capital gain to the later, but other concessions may exempt or reduce/discount your capital gain. Further, you can choose to rollover part or all of your capital gain and apply one of the other concessions for the remaining gain to reduce your assessable income. There are no limitations on how many concessions you can apply to the capital gains as the main idea is to achieve the best tax result for your circumstances, this means applying as many concessions until the capital gain is reduced to nil. Again, to be qualified for the Small Business rollover, you need to satisfy the basic conditions mentioned above.

Despite the advantage of CGT rollover, you will not be able to recognise the capital gain to your assessable income until circumstances change that cause the CGT event to crystallise the gain; for instance, you cannot replace the asset within the required time or sell the replacement asset. Until the CGT event happens, the original capital gain had been crystallised. Hence, you will make the same amount of capital gain to all or part of the gain that was previously deferred. To add to that, there are restrictions on which CGT concessions can be used and how they can be applied and what concessions are available depending on the CGT event that caused the gain to crystallise.

Please refer to ATO website for further info on what the circumstances are that can cause the gain to crystallise and at what stage the gain crystallises. Very important point here, there are other circumstances that can cause the gain to crystallise if the replacement or improved asset is a share or interest in a trust.

As mentioned earlier in this topic, there are additional CGT rollover conditions that need to be satisfied by the end of the replacement period. This period starts a year before and ends two years after the last CGT event that occurred in the income year for which you choose the rollover. If the rollover conditions are not met within the replacement asset period, the gain will crystallise, and the Commissioner may extend the replacement asset period. To satisfy the conditions you need:

  1. To replace the asset or make a capital improvement to the existing asset, or do both, within the replacement asset period
  2. To ensure the replacement asset or improved asset is an active asset at the end of the replacement asset period
  3. To ensure the total cost of the replacement and improved assets is equal or greater than the gain that was rollover

You can purchase more than one replacement asset or improve one or more existing asset rather than acquiring a replacement asset and you can rollover even when the replacement asset has not been acquired or improvement is not yet incurred. It is crucial to record the details of your rollover, note the start and end date of the replacement asset period and cost to replace or improve the asset.

With replacement asset of share or trust interest, more conditions are applied to satisfy the rollover. If the asset used had met the condition of replacement asset and it’s decided to stop using the asset, the CGT event occurs as the result of asset being considered no longer active. CGT can also be crystallised if the expenditure of the asset replacement or improvement is less than the capital gain, and this is called insufficient expenditure. The last condition is if there are no expenses whatsoever for asset replacement or improvement and it falls under replacement asset condition.

Please refer back to ATO website for further information and examples.

If you have any questions please call your client manager on (03) 9580 2419 or contact our Accountants here

 

 

 

 

Alan Maddick - Speaker Profile

Alan Maddick is a Chartered Professional Accountant, entrepreneur, speaker, businessperson and CEO. For the past 10 years Alan has been instrumental in helping all types of businesses – from your smaller enterprises, right through to some of Australia’s biggest franchise groups and organisations - achieve their business and personal goals.

 

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