Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes.” But the truth is that taxes are not as imminent as one may think. Government laws do provide exemptions and breaks for cases where it may be needed. One such area that these exemptions may apply is the Capital Gains Tax.
What is Capital Gains Tax?
Capital Gains Tax, or CGT for short, is a tax implemented on any gain of value of capital investments such as property, stocks, contracts or assets. One such example would be on real estate. Say your property’s value increases from $1 Million to $1.2 Million in a year’s time. The increase of $200,000 will be taxable.
But the Australian Tax Office has identified certain conditions that CGT can be waived for small businesses. One such case would be the small business 15-year exemption. Taxation law states:
“If your business has continuously owned an active asset for 15 years and you're aged 55 or over and are retiring or permanently incapacitated, you won’t have an assessable capital gain when you sell the asset.”
This can be a big tax break for small business owners, especially those in their later years. So how does one go about getting this tax break? Below is the procedure as given by the ATO.
How to get the Tax Break
- Confirm that you have met the basic conditions for the small business CGT concessions have been met. Of course, there’s a list of conditions to prove that you’re truly eligible for the exemption. More on the basic conditions can be found here.
- If the asset in application is a company share or trust interest, or a company-owned asset, you will need to confirm that there was a significant individual who owned the asset for a minimum of 15 years. You can refer to the workpaper significant individual test to check this. The 15 years do not have to be continuous and special rules can apply to trusts that have had losses.
- Confirm that the asset was continuously owned for the 15 year period leading up to the Capital Gains Tax event. There are circumstances that the taxpayer will be allowed to track back the period of ownership to the time when they or the transferor acquired the asset. The bottomline is to assess carefully whether the entity has owned the asset for the 15-year period.
- Confirm that the taxpayer or significant individual was either 55 years of age or higher or permanently incapacitated before the CGT event.
- Once the concession is available, disregard 100% of the capital gain. Note that taxpayer should not apply capital losses to the gain before applying the exemption.
- Calculate the participation percentage for each CGT concession stakeholder in the cases of companies or trusts.
- Multiply each CGT concession stakeholder’s participation percentage by the exempt capital gain.
- Pay the amount exempt from CGT to the concession stakeholders of the company or trust within two years after the CGT event. The amount to be paid to each individual must not go beyond the amount one comes up with in step 7.
- Complete the checklist for 15 year exemption which will stipulate the ability of the taxpayer to access the exemption.
- Consider whether the taxpayer or CGT concession stakeholder wishes to contribute a portion of the finances saved from the exemption to their lifetime CGT cap under the superannuation contribution rules in section 292-100.
Want Some More Help?
If you’re eligible for an exemption to Capital Gains Tax and need assistance in going through the procedures, we would love to help you out. Feel free to contact us anytime if you have further questions or clarifications on cases. We’d be more than happy to walk you through the process!