New CGT rules means great tax savings for small business. But you need to prepare. By TERRY HAYES from Thomson Legal & Regulatory.
By Terry Hayes of Thomson Legal & Regulatory
The new CGT changes affect the small business capital gains tax concessions and they apply from July 1, 2006. That means they are relevant and applicable for the financial year that will end on June 30, 2007.
There are four main capital gains tax (CGT) concessions for the assets of small businesses in the tax law:
- The 15-year exemption – an individual small business taxpayer is entitled to a full exemption from CGT regarding, for example, the sale of an asset that is subject to CGT where the asset has been continuously held for 15 years, the taxpayer is at least 55 years old, and the sale of the asset occurs in connection with the retirement of the taxpayer. The 15-year exemption has priority over the other small business CGT concessions.
- 50% concession – a capital gain can be reduced by 50% if conditions are met.
- Retirement exemption – basically, a taxpayer can elect to disregard a capital gain up to a lifetime limit of $500,000 if the proceeds from the sale of an asset, for example, are used to pay an eligible termination payment. This exemption cannot be used if the 15-year exemption applies.
- Rollover for replacement assets – in essence, where assets are sold and replaced by new assets, any capital gain on the sale of the old assets can be ignored up to the value of the replacement asset.
Some of the concessions can even be used in combination to reduce further a capital gain.
The new changes that have just recently been passed by Parliament are meant to simplify the concessions and make them easier to access for more SME operators.
Hopefully that is true, but it is always advisable for SMEs to talk to their accountants about the changes and how they might best make use of them. The potential is there to reduce tax bills when the concessions are effectively applied.
Here’s a summary of some of the new rules:
Under the revised small-business rollover rules, a taxpayer can defer a capital gain (on the sale of an asset, for example) in the year the gain is made, pending the reinvestment of the sale proceeds into a replacement asset.
If the proceeds of the sale have not been reinvested within two years, a capital gain arises at that time. Under the old rules, taxpayers would have had to account for a capital gain upfront in the year it was made if they had not yet reinvested the proceeds.
In another very useful change, roll-over (that is, deferral of a capital gain) will now be available to the extent the sale proceeds are reinvested in a replacement asset or in improving an asset already owned by a business.
Under the old rules, the proceeds had to be wholly reinvested in a newly acquired asset (that is, a taxpayer could only choose to roll-over all of a capital gain). The new rules are therefore more flexible and don’t put business operators in a CGT straight-jacket.
The new rules also allow a person to gift a business asset rather than requiring the asset be sold. This again provides much more flexibility and recognises that many small businesses are family businesses where the owners might prefer to gift an asset, such as the family farm, to their children rather than selling it to access the retirement exemption.
The new rules allow beneficiaries of a deceased estate to access the small business concessions to the same extent that the deceased could have used them just before his or her death, provided the assets are disposed of within two years of the deceased’s death.
This can allow family businesses to sort out their immediate future without having the dislocation and worry of tax issues at a very difficult time.
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The changes to the small business concession tax rules certainly provide much more flexibility for SMEs and represent a change for the better. However, there are conditions that need to be met to access them and SME operators should (a) be aware of the changes, and (b) talk to their advisers about how to use them in the most effective way.
Tax savings await those who act on the changes.
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
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