If you are planning to sell your business or have sold your business, let me show you
how you can pay absolutely ZERO tax and pocket all the profits!
This is completely legal and the ATO actually encourages you to do this.
What’s up tax fam!
Understanding Capital Gains Tax and how it’s calculated on the sale of your business is
super useful.
So, in this video I’m going to talk about small business CGT concessions and how you
could possibly pay zero tax when you sell your business.
Yeah you heard it. Zero tax.
First thing’s first, let’s chat about Capital Gains Tax, or CGT.
Basically, that's the tax that you pay when you sell an asset like a house, or business,
or a portfolio of shares, and you make a gain.
For example, if you buy a house for $500K, you sell it for $600K – that means you’ve
made a ‘capital gain’ of $100K.
When you make a capital gain, the profits are then added to your taxable income and
could increase the tax you need to pay when you lodge your tax return.
And if you make a capital loss, it will be offset on future capital gains.
But CGT isn’t all doom and gloom, if you know how to take advantage of the tax concessions,
it can benefit you immensely.
Now, let’s look at how CGT works on the sale of a business.
For small business owners who are looking to sell their business or sell the assets
used in the business, such as a shop or a factory, accessing one or more of these concessions
can significantly reduce your Capital Gains Tax liability.
Also, the profit on the sale of your business could be disregarded, reducing your taxes
to zero.
The amount of CGT you pay depends on how you can use the concessions effectively for your
situation.
For example, Leon started his business himself, and has grown his business so he now earns
a profit of $200,000 a year. He is taxed at the 45% tax rate.
When he sells his business, the capital gain will be added to his personal income, and
the capital gain will be taxed at 45%.
Note if he held the business for more than 12 months he can get a 50% discount on his
gains using the 12 month discount for capital gains rule.
To qualify for the small business CGT concessions, you will need to meet a set of conditions
imposed by the ATO. You may qualify for one or more of the small
business CGT concessions if you meet the following steps:
Number one: your small business turns over less than $2 million each year or the total
value of your net assets and related entities doesn’t exceed $6 million.
Number two: the asset being sold is an active asset, in other words, the asset is being
used for the business purpose.
The ATO suggests considering the following pointers to determine if your asset is an
active asset or not:
The active asset test is satisfied if the asset was an active asset of yours:
For a total of at least 7½ years the asset was used for the business, if you've owned
it for more than 15 years, or
For at least half of the ownership period it was used for business, if you've owned
it for 15 years or less.
On the other hand, if you set up your business as a company, you’ll also be able to reduce
your tax rate to 26% for the profit he earns and also qualify for a small business CGT
concession.
There are four possible concessions that could be eligible when you sell your business
The first one is the 15-year exemption: This is definitely the most generous of the
four small business CGT concessions because the entire capital gain may be exempt from
tax.
According to the ATO, to qualify for the 15-year exemption, you must have continuously owned
the asset for a period of 15 years or more just before the sale of that asset.
If you are an individual, you also have to meet the following conditions when the sale
of the asset occurs:
- You must be at least 55 years old, and the sale of the asset occurred because you decided
to retire; or
- You were permanently incapacitated.
Let’s have a look at an example
Jonathan bought a factory in Sydney, NSW and he has owned the factory and used it for business
since he bought it in 1995.
Jonathan is turning 65 years old this year and is looking to retire.
But because his children have all successfully built their careers in the corporate world,
he decides to sell the factory.
He purchased it for $1,000,000 and now sold it for $2,500,000.
Jonathan made a capital gain of $1,500,000 on the sale of the factory.
He has owned the land for more than 15 years straight and he is above the age of 55 years
old, so he qualifies for the small business CGT 15-year exemption as long as he meets
those other tests.
The capital gain is set aside and Jonathan won’t need to pay capital gains tax on the
sale of the factory.
The second concession is the 50% active asset reduction:
So let’s take a look at Nicholas’ example.
Nicholas owns a small commercial property in which he used to run his business. In 2020
he decided to sell the property to start a new business venture.
He made a capital gain of $19,000 on the sale of his business property.
Nicholas purchased the property in 2016. As he had owned the property for more than 12
months when he sold it, he qualifies for a 50% CGT discount:
That’s $19,000 x 50% = $9,500
BUT he ALSO qualifies for the 50% active asset reduction because he meets the ATO’s basic
conditions:
His business turns over less than $2 million each year; and
the asset being sold is an active asset, in other words, it was used for business purposes.
So he is only liable to pay CGT on $4,750.
Assume that his tax rate is 37% he only pays tax $1757.50.
That means he only paid less than 10% of tax on the overall capital gain.
Simple as that!
Next, we have the retirement exemption:
According to the retirement exemption, you won’t have to pay CGT on your assets up
to a lifetime limit of $500,000. The retirement exemption can be used with or instead of the
50% active asset reduction.
If you decide to retire early - in other words, you retire under 55 years old, and have chosen
to use the retirement exemption, you’ll have to pay the exempt amount into a complying
superannuation fund or retirement savings.
So, let’s use an example:
Lilly, who is a fruit farmer and has been running her business for at least 20 years,
has decided to retire early and sell her farm so that she can go live on the coast with
her new grandchildren.
She is only 53 years old.
Lilly made $1million capital gain from the sale of her farm. She purchased it for $200,000
and sold it for $1.2 million.
She doesn’t meet the requirements for the 15-year exemption, so she applies for the
retirement exemption instead.
She meets the basic conditions for small business CGT concessions, as well as the requirements
for the retirement exemption so she can set aside the entire capital gain.
But because she is under 55, she has to contribute the limit of $500,000 capital gain to her
superannuation fund.
If she wants to reduce the amount of money that goes into her super, Lily can choose
to use the 50% active asset reduction and 50% 12-month discount to reduce the net capital
gain and rollover a smaller amount to her superannuation fund. This means she pays absolutely
ZERO tax from the sale of her farm.
So this sounds confusing, so let’s do the maths.
$1 million capital gain 12 month 50% discount reduces it to $500,000 50% active asset reduces
it to $250,000 contributed $250,000 to super.
You are left with Zero capital gains which means you paid zero tax for that $1million
gain
And the best part of it is that it's 100% legal
People might say to me that they have had to contribute $250,000 into super.
But for your information, superannuation tax rate is taxed at 15% and when you retire it's
at 0%.
Most business owners would prefer that any future income they make on that $250,000 that
is contributed into super is either taxed at 15% or taxed at 0% when they retire.
Now, what is the replacement asset rollover? That brings me to the last small business
CGT concession.
According to the rollover concession, if you sell a business asset, you can elect to roll
over the money that you received from that to buy another asset, and you've got up to
two years to do that.
So, if you receive $1,000,000 from a sale of a business, you can apply the 50% general
discount, then apply the 50% asset reduction. So you’re left with $250,000 in capital
gain.
You can then buy a $250,000 replacement asset but it must be an asset that’s related to
a business and you need to buy this within two years and as a result, you pay no tax!
Keep in mind, this video is to provide general information, so you’ll want to consider
getting personalised advice from an accountant before planning or going through any big transactions
like this. You can make millions of dollars and pay zero taxes. But if you get it wrong,
you’re probably gonna pay millions of dollars in taxes.
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hope that was very helpful for you guys.
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See you guys next time!