As a business owner, you probably did not enjoy superannuation guarantee contributions along the way as your employees did. The act of growing and creating your own business was your superannuation. The government acknowledges a range of tax-efficient ways to sell the business and either avoid or reduce the tax on the sale of the process entirely through the small business capital gains tax concessions.
How to get the sale tax-free
One of the most generous tax concessions is the ability to sell your business tax-free through the small business capital gains tax concessions. Like any great tax concession, the small business capital gains tax concessions have a range of anti-avoidance mechanisms to stop tax abuse, so they are complex.
Eligibility tests for SBCGT?
The small business capital gains tax concessions have four critical gateways to access them. If you don’t pass the initial gateway tests, you will not be able to enjoy any SBCGT tax concessions, regardless of how you present them.
The four gateway tests for the small business capital gains tax concessions are:
Capital assets only: The asset sold must be a capital asset. You cannot apply the tax concessions to revenue assets, including stock, plant, machinery, and equipment, on the sale of your business.
Business assets only: The asset is only available to a trading and operational business. So, commercial land that is leased to somebody else will not qualify. The same land you own and leased to your business will be eligible.
Significant individual: You must own at least 20% of the business asset. So, owning part of, say, BHP through the ASX won’t qualify even though BHP is a business.
Small business only: The company sold must have a turnover under AUD 2m, excluding GST. Alternatively, the family selling the asset must have control of assets worth no more than AUD 6m (excluding the family home and superannuation fund).
The above tests have a range of complex and deep tax scenarios that can apply to them. And understanding how capital gains tax works will help apply those situations. A discretionary trust never has a single person owning at least 20%, so the law has some alternative tests. Likewise, the definition of a controlled asset is broad and complicated, with the market valuation rules applicable to the $6m test.
How to access the SBCGT concessions
When looking at the concessions, the following steps are important:
Plan early
When you are looking to enjoy the SBCGT concessions, the application of the concessions is part of your long-term succession plan for the business and your eventual succession. Notably, small business capital gains tax concessions are all-or-nothing tax concessions. The concessions are not gradually reduced as you exceed the above benchmark thresholds. You either qualify for the tax concessions, or you don’t.
Many successful business families will factor in these concessions’ losses as their business grows. So, with prudent tax advice from their Perth tax accountant along the way, a business family can identify the moment in time when a business family is about to lose the tax concessions as the business will either breach the AUD 2m test or their will breach the AUD 6m market value test. They will then restructure their affairs, trigger a capital gain, and enjoy a capital gains tax cost base uplift for use later.
Get advice before your start sale negotiations
The small business capital gains tax concessions can result in you enjoying the sale proceeds tax-free or possibly losing half of the sale proceeds in tax.
Given the significant difference taxation can make to a transaction and how access to tax concessions can drive the structure of the sale, getting advice before you prepare the information memorandum is important. You don’t want to change the sale mid-negotiations just to enjoy the tax benefits.
Taxation is only one of the 13 key points when selling the family business – and it is a key point.
Consider restructuring well before the sale
The application of the small business capital gains tax concession rules is complex. And some restructuring, done on paper or by moving assets around, can make the difference between enjoying the concessions in full or missing out. So, taking an active and commercial approach to the small business capital gains tax concessions in advice can make a significant difference in how you
The restructuring might involve upgrading the family home to reduce your controlled assets, making significant super contributions or selling the business from a trust to a company so that the sale can flow through a scrip-for-scrip rollover as you sell part of the business.
Get advice during contract preparation
The contract for the sale of your business is typically focused on managing your risks, including indemnities and warranties, and protecting both parties during the tax and financial due diligence. However, the form of the legal contract can drive the outcome of the small business capital gains tax concessions, so it is essential that the lawyers properly draft the contract for the SBCGT concessions.
Get advice after the sale
The small business capital gains tax concessions also have a range of benefits that can apply once you qualify including taking funds for retirement, putting money into your superannuation fund or investing into another type of business.
Importantly, using these concessions is very time-centric and specific. If you qualify for the concessions but then make contributions to your super fund too late, buy another business too early, or trigger an event before you are 55, the concessions you think you are accessing might not work—and with disastrous consequences.
What are the concessions?
The tax concessions for SBCGT are generous. They can be layered with other concessions (sometimes) and integrated into your superannuation tax strategy to maximise your transfer balance account report before you start a pension for your superannuation fund.
The concessions are:
15 year concession: One of the most challenging and most generous. The entire sale proceeds are tax-free, can leave a company tax-free and be injected into superannuation ($1.78m per person) without triggering excess non-concessional super contributions tax.
Active asset concession: A reduction of 50% of the capital gain. The small business CGT active asset concession can be used with the 50% CGT discount, so you can enjoy 75% of the net taxable profit on sale tax-free.
The retirement concession: You can contribute $500k to your super fund tax free. This is a lifetime limit for each person.
The retirement concession works for both a self-managed superannuation fund or an industry super fund.
The replacement asset concession: You can look for another business and allocate the profit from the sale of your business against the purchase price of the new business you have invested in.
Using the tax concession creatively and other tax concessions, like the superannuation downsizer contribution, can allow a business family to quickly increase their superannuation fund balances well above the size typically allowed to a salary and wage earner.
SBCGT and Succession
There is often a lot of talk about using SBCGT when the business is sold. And that conversation typically assumes the sale is to an outsider. However, this is not always the case. Sometimes, the sale of the family business can be to the next generation, and accessing sale proceeds tax-free can allow families to gift monies and rebalance the wealth such that private debts, say on children’s homes, are now restructured as a business debt with tax deductibility on that.
Conclusion
Every start-up founder should have a business with an exit point for the business. Getting the business plan to consider tax advice, especially the small business capital gains tax concessions, can make a massive long-term impact on the wealth and success of a business family. And this is where Westcourt is a natural choice. As a tax advisory firm with only one focus, deep international reach, commitment to independence and award-winning technical expertise, we have a natural edge over other advice businesses – so why not give us a call?
