By Max Newman
When the small business capital gains tax concessions were introduced eligibility was dependent upon the owners having net assets of under $5 million. When the small business entity tax concessions were introduced eligibility for the CGT concessions were changed.
The first criteria for eligibility was the business needed to be classed as a small business entity, in other words its turnover had to be less than $2 million. If this test is not passed small business owners can still be eligible for the CGT concessions as long as their net assets are less than $6 million.
The ability to reduce tax on a capital gain made on the sale of a business, once the eligibility criteria have been met, is restricted to gains made on active assets. Active assets are those used in the conducting of a business, such as land and buildings, and also intangible assets such as goodwill.
Q. My parents are both over 65 and still working. They operated a business from a property purchased in 1994 for $100,000. In 1999 they stopped running the business and commenced renting the property. The property has been rezoned and is worth approximately $1 million. We would like to know what options there are to minimise their tax on the potential sale of the property, and is it an option to transfer the asset to a trust?
A. The best option for your parents to minimise tax payable on the sale of the ex-business property would be if they qualified for the small business CGT concessions. In their case this would mean for the five years that they ran their business its turnover would need to have been less than $2 million, or the current value of their net assets is under $6 million.
If their property qualified as an active asset they could claim the 50 per cent general exemption, claim the 50 per cent active asset discount, and effectively pay no tax on the balance of the gain made by claiming the small business CGT retirement exemption.
For an asset to be classed as an active asset it does not have to be used in the running of a business for the whole time it is owned. Building premises, like the property owned by your parents, can be rented out and still qualify as an active asset.
If an asset is owned less than 15 years it must have been used in the running of a business for at least half of that period. For assets owned longer than 15 years they must have been used in the running of a business for at least seven and a half years.
As the property owned by your parents was only used in the running of the business for five years, out of a total period of ownership of 23 years, the property will not qualify as an active asset and the 50 per cent discount cannot be claimed.
If the property was sold for $1 million your parents would be eligible for the 50 per cent general exemption and would pay tax on the $450,000 taxable gain remaining. Transferring the asset to a trust would not achieve anything as a capital gain would be made on the market value at the time of the transfer.
Source: The Age