Capital Gains Tax (CGT) is one of those concepts, business owners and investors know about but don’t always fully understand. It can have a big impact when selling assets like a business, property, or shares, so it’s important to plan ahead and make the most of available tax concessions.
As business owners, managing your CGT should be a critical part of your financial planning to minimise your liabilities and maximise the returns on your investments.
What is Capital Gains Tax?
CGT is the tax you pay on the profit made when selling a capital asset, essentially when you sell something for more than you bought it. The difference between the sale price and the purchase price is considered a capital gain, and that’s what gets taxed.
CGT applies to various types of assets, including:
Business Assets
Real Estate (except for your primary residence under certain circumstances)
Shares and Securities
Investment Properties
Collectibles like artwork, antiques, and jewellery
Cryptocurrency
Selling Your Pharmacy? Here’s What to Consider
1. How to Calculate CGT
Calculating CGT involves determining the capital gain or loss on the disposal of an asset. The formula for calculating capital gains is relatively straightforward:
Capital Gain = Sale Price – Cost Base
Your cost base includes:
The original purchase price
Transaction costs (e.g., legal fees, stamp duty)
Any changes to capital improvements or depreciation claims you’ve made to the asset.
It is essential to keep detailed records of these expenses, as they will help ensure accurate cost base calculations.
2. Capital Gains Tax Discounts
In Australia, individuals and trusts are generally entitled to a CGT discount of 50% if they’ve held the asset for more than 12 months. This means that only half of the capital gain is subject to tax, effectively reducing the amount of CGT payable.
Small business owners may also qualify for special CGT concessions, which can reduce, defer, or even eliminate your CGT liability. These are worth looking into before selling any business assets. However, determining eligibility and applying these concessions can often lead small business taxpayers astray.
3. Capital Losses
If you sell an asset for less than you paid, that’s a capital loss. While you can’t claim it as a deduction against your regular income, you can use it to offset capital gains in the same income year or carry it forward to future years. It’s important to consider both capital gains and losses when calculating your overall CGT liability.
Small Business CGT Concessions: How They Work
Navigating the landscape of small business capital gains tax (CGT) concessions can significantly impact your tax liabilities when selling business assets. But, what are the Small Business CGT Concessions available?
There are four concessions that may be available to reduce capital gains made by a small business in respect of eligible assets:
15-Year Exemption: If your business has continuously owned an asset for at least 15 years and you are aged 55 or over and retiring or are permanently incapacitated, you may be eligible to completely disregard any capital gain on the sale of the asset.
50% Active Asset Reduction: This concession allows you to reduce your capital gain by 50%. It applies to active assets, which are assets used or held ready for use, in the course of carrying on a business.
Retirement Exemption: Capital gains from the sale of active assets are exempt up to a lifetime limit of $500,000. If you are under 55, the exempt amount must be contributed to a complying superannuation fund.
Rollover Relief: If you sell a small business asset and buy a replacement asset or make improvements to an existing asset within the 2 years of the CGT event, you can defer your capital gain until the disposal of the replacement asset.
Do You Qualify for CGT Concessions?
The Small business CGT concessions are designed to help small business owners reduce their capital gains tax liability. These concessions are particularly beneficial when a business disposes of an asset that has appreciated in value.
To qualify for these concessions, you must meet several eligibility criteria:
Your business must have an aggregated turnover of less than $2 million, or your business assets must not exceed $6 million (maximum net asset value test).
The asset must be an active asset.
Additional conditions apply for each specific concession, such as age and duration of asset ownership.
Maximum Net Asset Value Test
One key requirement for accessing small business CGT concessions is meeting the maximum net asset value test. This test helps determine whether you qualify for CGT relief based on the total value of your assets.
Before a CGT event occurs (such as selling a business asset), the total net value of your CGT assets, along with those owned by certain related entities, must not exceed $6 million. This amount includes the asset being sold.
The net value of CGT assets is determined by taking the total market value of all assets and subtracting liabilities directly related to them. Additionally, certain provisions such as for annual leave, long service leave, unearned income, and tax liabilities are deducted.
The $6 million threshold considers not just assets owned by you as the taxpayer but also those held by "connected entities" and "affiliates." Many business owners overlook this aspect, leading to errors when assessing their eligibility for CGT concessions.
Common Mistakes When Applying the Test
The Tax Office has identified several common errors when applying the maximum net asset value test, including:
The valuation of assets at historical cost rather than market value just before the CGT event;
Not including the CGT asset sold in the calculation;
Not including the relevant goodwill assets in the calculation.
The Tax Office added that where a market value is required, accepted valuation principles should be applied.
Examples of CGT Concessions in Action
Assuming that you have satisfied all the eligibility criteria, below are a couple of examples of how the concessions could be applied:
Example One
15-Year Exemption: Joseph has owned and operated his pharmacy for 20 years. He decides to retire at the age of 60 and sell the pharmacy, which includes the business premises valued at $800,000, which he originally purchased for $300,000. Since Joseph meets the requirements of the 15-year exemption (over 55 and retiring, and the asset has been held for more than 15 years), he can completely disregard the capital gain of $500,000 from the sale of his pharmacy.
Example Two
50% Active Asset Reduction and Retirement Exemption: Samantha runs a community pharmacy and decides to sell one of her packing machines for $50,000, which she bought five years ago for $30,000. The machine qualifies as an active asset. Samantha can first apply the 50% active asset reduction, reducing the capital gain to $10,000 ($20,000 gain reduced by 50%). Since Samantha has not previously used the retirement exemption, she decides to apply it to this gain, making the $10,000 gain completely tax-free.
4. Timing of Contracts
For effective tax planning, the timing of when you enter a contract for the sale of an asset can be critical. Why? Knowing the time is important because it determines in which income year you need to report your capital gain or capital loss from the event.
If you dispose of a CGT asset to someone else (for example, you sell it to someone), the CGT event happens on the date the contract was signed. If there is no contract, the CGT event generally happens when you stop owning the asset.
For example, you enter into a contract to sell your pharmacy in June 2024 (the 2023–24 income year). The contract settles in October 2024 which is the following income year, 2024–25. When reporting the CGT event, your capital gain or loss was made in the 2023–24 income year when you entered into the contract, not in 2024–25 when the contract was settled.
Where to next?
If you’re considering selling your business or a significant asset, it’s essential to plan ahead. The right strategy can help you save thousands in taxes.
Want to make sure you’re getting the most out of these tax-saving opportunities? Talk to our team before you sell! We’ll help you navigate the process and make sure you’re taking full advantage of all the concessions available to you.
