Capital gains tax needs to be considered whenever a business does any one of a multitude of everyday things. By TERRY HAYES of Thomson Legal & Regulatory
In many respects, capital gains tax (CGT) is one of the biggest “sleepers” in the Australian tax system.
It needs to be considered whenever a small business does a multitude of what may seem like everyday things, such as selling an asset (including land or buildings), selling part of the business, buying out a partner in a business, making additions to a factory, buying a new business, altering the structure of a business (for example, incorporating a trust), receiving compensation for loss or destruction of assets of the business, and so on.
The list is not endless, but it is long, and SMEs need to be aware of the sorts of things that may attract CGT. The tax office has repeatedly said many taxpayers, including SMEs, are simply not returning capital gains. In some instances, they may not even be aware that the capital gains laws apply to something they’ve done. In other cases, they just ignore those laws.
The message is simple – talk to your accountant or your adviser before you buy that asset, sell part of the business, etc. It’s too late to think about the possible implications of CGT after the event.
Keeping good records
Another very important aspect of dealing with potential CGT issues is to keep good records – true of anything to do with tax, but especially so with CGT. In simple terms, a business must keep records of every act, transaction, event or circumstance that may be relevant to working out whether it has made a capital gain or loss.
Those records must be kept for at least five years after the event that resulted in them making the gain or loss. For an asset held for eight years and then sold, for example, the records would need to be kept for 13 years.
However, rather than the messy process of keeping individual receipts and invoices, a business can set up an asset register. An accountant can help with this and it greatly simplifies the record-keeping process. The tax office itself can also help here. Taxation ruling TR 2002/10 contains a sample asset register that taxpayers can use. It is available on the tax office website. http://www.ato.gov.au
The asset register should show:
- The date the asset was acquired.
- The cost of the asset.
- A description, amount and date for each cost associated with buying the asset (such as stamp duty and legal fees).
- The date the asset was disposed of.
- The amount received on disposal of the asset.
- Any other information relevant to calculating a CGT obligation.
Creating a trail in the life of an asset owned by a business is absolutely critical for CGT purposes. Details such as the date a CGT asset was bought and the amount paid for it is crucial to establishing the cost base of that asset. When that asset is sold, the cost base forms a core part of the calculation to determine what the capital gain is and what amount needs to be included in the SME’s tax return.
What the ATO is looking at
It also pays to be aware of what CGT issues the tax office will be looking at. This year, it will particularly look at:
- Businesses that set up arrangements to reduce their capital gains when the business is sold.
- Claiming small business CGT concessions when a business does not satisfy the relevant threshold requirements. To qualify for these concessions, the maximum net value of the assets of a business must be $5 million or less, but this threshold is in the process of being changed so that, from July 1, 2007, it might only be $2 million.
There are four main SME capital gains tax concessions:
- A CGT exemption where an asset is held for at least 15 years.
- A 50% “active asset” reduction.
- A retirement exemption.
- Rollover relief for disposal of some assets (effectively deferring CGT).
These concessions can significantly reduce the CGT to be paid, for example to nil where an asset has been held continuously for at least 15 years, and provided several other tests are met. However, strict tests apply and the advice of an accountant is recommended to ensure a business correctly satisfies the tests.
Failing to report CGT “events” ie something that gives rise to the application of the CGT laws.
The tax office also looks for significant changes in depreciation claimed and asset registers, which may indicate that an asset has been sold. If an asset has been sold, there may be a capital gain to be returned.
Questions to ponder
It’s worthwhile for an SME owner to keep the following questions in mind throughout the year:
- Has the business sold any real estate in the last financial year?
- Has there been a change to the title of real estate owned (or partially owned) by the business?
- Has the business granted, changed or varied a lease over its real estate in the past year?
- Has the business built any new premises or altered existing premises?
- Has any building or capital improvement of the business been destroyed in the last year?
- Has the business owner used part of his or her main residence to conduct the business?
- Has the business altered its structure during the year, such as from a partnership to a company or trust?
If the answer to any of these questions is “yes”, then CGT implications may arise. Better still, see your accountant or adviser before you do any of the above. Once the CGT horse has bolted, it’s too late!
For further insights into pertinent taxation issues see the Growth Resources section on tax by clicking here.
Terry Hayes is the senior tax writer at Thomson Legal & Regulatory, a leading Australian provider of tax, accounting and legal information solutions; www.thomson.com.au