| CAPITAL GAINS TAX (CGT) CONCESSIONS FOR SMALL BUSINESS – TIPS TO OVERCOME COMMON MISTAKES
Various CGT concessions are available to reduce the impact of capital gains tax when small businesses dispose of CGT assets such as their business or a business asset.
The most common CGT assets are:
Less common CGT assets include:
The maximum net asset value test
A common mistake taxpayers make is not meeting one of the basic conditions for entitlement to these concessions – the maximum net asset value test.
From the 2007-08 income year, to pass this test, the total net value of CGT assets just before the CGT event must not exceed $6 million. The net value of CGT assets must be included for all of the following:
This does not include and asset already counted for entities that are connected with the test entity.
For your clients to pass the maximum net asset value test you need to:
Your client can only exclude assets that are both of the following:
The small business entity test
This test is another basic condition taxpayers must satisfy in order to qualify for the small business CGT concessions. One of the key elements of this test is to work out if the taxpayer is classified as a small business entity for the current year using the aggregated turnover test of less than $2 million.
Using your client’s aggregated turnover, you can work out if your business client is a small business entity for the current income year using one of the following three methods:
Active asset test
Taxpayers often fail to satisfy this test by miscalculating the periods in which the asset was an active asset. When considering this test, remember:
Often, the sale of a business includes a clause for further payments to be made in respect of future earnings. The market value of rights to further payments (referred to as earn-out rights) must be included in the capital proceeds of the CGT event A1.
Settlement date versus contract date
You should apply any CGT concessions applicable at the time the contract was signed, not at the settlement date.
For disposals of assets (CGT event A1), the CGT event occurs when the disposal contract is signed.
Where the settlement date is in a different financial year to the date the contract was signed, declare the capital gains in the financial year when the contract was signed.
Applying capital losses
You must apply capital losses in the correct order, except where the 15-year exemption applies. Where the 15-year exemption does not apply, you should:
If the small business 15-year exemption applies, do not reduce the capital gain by any capital losses before you apply that concession.
In all other cases, apply the CGT discount and the small business concessions to the capital gain after you have reduced it by any current and earlier year capital losses.
If your client has more than one capital gain, you can choose the order in which you reduce capital gains by capital losses.
WHAT YOU NEED TO DO
Ensure that they keep records:
If they have applied a net capital loss, you should generally keep records of the CGT event that resulted in the loss for four years from the income year when the net capital loss is fully applied.
For more information, refer to:
To access these publications, visit our website at ww.ato.gov.au and select: Business – Tax topics A-Z – A-C – Capital gains tax (CGT) – Small business concessions.
Source: Tax Practitioner Seminar – June 2010
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