So, broadly speaking you’re looking to make capital gains or a sale of business assets or investment assets and just like any Australian, your intention is not to pay any more taxes than is needed on the gain on those when you do sell them.
There’s three main ways, or tax concessions, I see to pay little, less or no tax:
- The General 50% CGT Discount;
- paying 0% tax in your superannuation fund; and
- the Small Business CGT concessions.
What is CGT?
‘CGT’ is ‘capital gains tax’.
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.
You buy a house for $500k, you sell it for $600k – that means you’ve made a ‘capital gain’ of $100k.
Tax might be up to $47,000.
The tax you pay on that capital gain depends on who owned the asset, and any concessions or exemptions you may be eligible for.
You pay CGT on gains you make on things like investment properties, business sales, sale of shares, managed funds (there’s more, but that’s an example).
The “General 50% CGT discount”
There is a ‘general discount’ for Capital Gains Tax.
This is available is assets are owned by individuals (people) or trusts (like family trusts, discretionary trusts or even Self Managed Super Funds are classed as a type of trusts – although Super Funds only get 33% discount, not 50%).
The general discount allows an individual or a trust a 50% discount on the tax they pay on their capital gain, so long as they’ve held an asset for more than 12 months.
You buy the same house above in January – then you sell in February the following year (13 months later), still making the same $100k capital gain.
The 50% discount means that you’ll only pay tax on 50% of the gain, or only tax on $50k.
Tax has now halved, and you may pay up to $23,500.
Paying 0% on Capital Gains made in Super
So in your superannuation fund, when you’re drawing a pension, the ATO gives you a tax break.
If you’re over the age of 60 and drawing a pension from your super balance (Note: not the transition to a retirement pension), then that tax rate is currently 0% on any income including capital gains. You need to be 60 years old, and your pension balance is taxed at 0%. (There are also other requirements and maximum balances too.)
So, say for instance that today you were to buy a commercial property that your business was renting. You do that through your self managed super fund, or SMSF.
Now, if you held onto that investment until you were 60 years old, and you were drawing down a pension at the time, then any gain on sale of that asset would be taxed at 0%. (This would be assuming your SMSF was 100% pension in your name – or other members also over 60 drawing a pension.)
Let’s put some numbers behind that.
Say you buy a commercial property worth 1 million dollars today, then 30 years later you sell that for 3 million dollars. So you’ve made a 2 million dollar capital gain.
Now, outside of super, if you purchased it in your own name you’d be up for quite a bit of tax, rough numbers $470k in tax.
But if you held the property inside your self managed super fund, you’d pay 0% and $0 in tax. (Again assuming you were 60 years or more, drawing a pension.)
That transaction would save you hundreds of thousands of dollars in tax by careful structuring.
Now, that applies to other investments like a residential investment property sale. Same with shares that you own in listed companies or other people’s businesses. So it’s pretty significant.
It’s like you’re having your own legal tax haven in Australia.
So, that’s the superannuation pathway of paying no tax on sale of assets.
Small Business CGT Concessions
Now, I mentioned at the start the small business capital gains tax exemptions were the other option.
This one applies to capital gains made from selling all or part of a business.
There’s also 4 concessions that are available for small businesses – so they’re pretty powerful tax saving strategies!
The four concessions are:
- 15 year exemption
- 50% active asset reduction
- Retirement exemption
The great thing about the concessions is that you can apply multiple concessions on the same transaction or ‘sale’.
Eligibility for Small Business CGT Concessions
Now, first we need to make sure that you’re eligible for those exemptions, and there’s three main tests that are looked at.
The first test is ‘does your business and any connected businesses turn over in total less than 2 million dollars in sales’. That would look at any connected entities. So, if you’re into two businesses, you need to make sure that turnover of total annual sales does not exceed 2 million dollars. If it does exceed that, all is not lost.
The second test is that you hold an asset as an investment (like a property), and it’s used in a ‘small business’ of a connected entity. Note: this one is not available to property held by Self Managed Super Funds.
The third test, and I would say the most heavily relied on, is the ‘$6M net assets’ test. This says the business owner selling the business has to have less than $6M in business and investment assets, less any debt (and not including some assets such as the family home or your superannuation).
So let’s say the business owner has $10M of assets – including debt of $3M, superannuation of $1M and a family home of $1M. Rough figures, the business owner would have $5M in net assets under this test, and be eligible for the concessions.
Running the numbers on the concessions
Let’s assume for all four concessions that we have a business sale of $1M. And you started it from scratch 16 years ago, so there was no original cost for you buying the business.
That means you have a capital gain of $1M, and without the concessions, assuming you held it through a trust or individually, you’d pay upwards of $235,000 in tax on that sale. ($1M x 47% tax rate x 50% general CGT discount.)
I might just mention as well those small business CGT concessions are only for business assets, they’re not for passive investment assets like listed shares or residential rental properties – but it can include commercial property that was used in the running of your business, unless held by an SMSF.
Let’s look at the concessions now.
15 year exemption
The first of the four concessions is the ‘BIG KAHUNA’!
This exemption says if you have been running the business for more that 15 years, you can disregard the capital gain COMPLETELY!
50% active asset reduction
Under this exemption, you get an additional 50% discount on top of your first 50% general CGT discount.
So you’d pay upwards of $117,500 in tax. ($1M x 50% x 50% = $250,000 x 47% tax)
Still a fair bit, but less than $235k!
This allows you to disregard a capital gain of up to $500k in value over your lifetime.
Now if you’re under 55 years old at the time, the money you disregard has to be put into super.
If you’re over 55, there is no requirement to put it into super.
The good thing about this is that you can apply the other reductions or concessions first.
$1,000,000 gain x 50% general discount x 50% Active Asset reduction = $250,000 gain.
If you’re under 55 years old and put the remaining $250,000 into your super fund, then you pay $0 in tax personally!
Now, the next one is the rollover relief. I’ve actually used this myself personally.
What it says is if you sell a business asset, then you can elect to rollover 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 the 50% active asset reduction. So you’ve got $250,000 in capital gain left.
You can then buy a $250,000 replacement asset (must be a business or an asset used in business) within two years and pay no tax!
Now, I think that wraps up the three main things that come to mind when you’re looking to pay as least tax as possible on business and investment gains.
Keep in mind I’ve skimmed over reams of pages of legislation here and wrote it based on today’s rules.
So this is very general help and we always say get personalised advice before planning or going through any big transactions like this. If you mess these up, it may cost you $100’s of thousands in tax that you didn’t expect to pay. So don’t say I didn’t warn you to get the advice!