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  • Cameron Finlay

Small Business CGT Concessions Can Be Complex

The ATO checks most claims for CGT Concessions, which are usually associated with the sale of businesses.

CGT claims are a significant target for review. The rules are complex. The Small Business Concessions were originally designed, in 1985, for businesses at the lower end of the business scale, for individuals to use with less than $6m in net assets, or for businesses turning over less than $2m a year.

However, there are complex tracing provisions for ownership, connected entities, and to determine where control exists. So, it is not just this ‘business’ to be considered for the tests but includes associates and entities over which control can be exerted. So, it may not just be a $2m turnover for the business sold but considers the turnover and value of other entities with which you may be deemed to be involved.

The ATO has released a number of tax rulings in order to clear up confusion and explain the complexity. The ATO said in one ruling many of the taxpayer claims are wrong, which to me is evidence of the complexity.

These four CGT concessions are available only for small business, assuming one of the basic conditions ($2m turnover or $6m assets) are met.

  • The 15-Year Exemption provides a total CGT exemption, where the asset was owned continuously for at least 15 years, the relevant individual is over 55 and is retiring or permanently incapacitated.

  • The Active Asset reduction provides a 50% reduction on a capital gain, as long as it has been held for over 12 months.

  • The Small Business Retirement exemption exempts capital gain from business up to a lifetime limit of $500,000. If under 55 years at the time of choice, the amount must be paid into a complying superannuation fund.

  • The Small Business Rollover allows a taxpayer to defer all or part of a capital gain on a business asset for up to two years. If you acquire a replacement asset within two years, the gain is deferred until you dispose of the replacement or change its use in certain ways (eg., ceases to be used in the business).

The complexity is not in the calculation, but in determining the right to claim them, after considering the connection and control rules.

The ATO also looks closely at valuations used for the $6m of assets (which excludes principal residence and superannuation), so these need to be supportable. That may mean obtaining estate agent opinions or independent valuations of business and property. Have the documentation ready before claiming the concessions, as the ATO requires information for its review to be supplied within 28 days.

Attached is a short form of a 2013 ATO Guide to capital gains tax concessions for small businesses, which is still current. It provides assurance that where the rules are followed (even if complex), the gains will be exempt.

Click the file below to get a copy of the ATO Guide to Capital Gains Tax Concessions

ATO Guide to Capital Gains Tax Concessions_14Sept2023
Download PDF • 84KB

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