At the ASF Audit Technical Seminar, Sanderson said many clients have built a business from scratch and have planned to eventually use the proceeds from their sale to fund their retirement.
“They may not have actually added funds to the super or made contributions over time, so it is very important that we are looking at that [CGT concessions] from that perspective,” Sanderson said.
When considering the use of CGT concessions for small businesses, he said it is important to fully understand what they actually comprise.
“Firstly, when you talk about these tax concessions when a business has been sold, you have to look at how much tax you have to pay and whether the customer is eligible for these concessions. There is also the element of maybe not paying any tax on the sale of a small business and this is where it is worth its weight in gold, but it is really complex,” he said.
“Getting it right is an area of immense complexity. The most valuable of golds is the 15-year exemption. So effectively, from that perspective, if you qualify, you can completely ignore a capital gain if you are eligible under the 15-year exemption. That may also apply if the business sold is a pre-CGT asset.”
The next thing to think about in relation to CGT concessions for small businesses, he said, is the 50 per cent reduction in working assets.
“Right now we can get a 50 percent blanket discount and a 50 percent active asset discount. So ultimately the capital gain can be discounted twice, so we’re only looking at 25 percent of the gain that you might actually be paying some tax on,” he said.
“That’s where, again, these concessions are fantastic. There are also the replacement asset provisions. The thing about this is that a lot of people might be able to defer the capital gain that actually shows up on their tax return on the basis that over a two-year period they may well acquire a replacement asset or another business asset.
“Then there is the retirement exemption, which is a contribution that must be made to the Super, where that is the amount that is not taken into account. Unfortunately, some of these particular provisions have not been indexed over time.”
Sanderson said the retirement exemption has been $500,000 for more than 25 years and the $6 million maximum net asset value test has not been indexed since 2007.
“These kinds of things are not in line with the growth of people’s wealth and the way these companies are valued. But unfortunately, that’s how the cookie crumbles,” he said.
“At the moment you have a 50 per cent discount and obviously with the CGT changes from 1 July 2027 you will have that indexation consideration as part of all this, but again there are really strict conditions.”
Sanderson went on to say that many people believe that if they have held the asset for 15 years they are eligible for these concessions, but it is not that simple.
“The first thing to do is make sure you satisfy the maximum net asset value test or you have the $2 million rollover for small businesses, and that’s an aggregate rollover,” he said.
“Some of the advantages of these tests are that there are certain assets that are exempt from the maximum net asset value, including retirement and primary residence, and assets that are for personal use and enjoyment only. Therefore, the vacation home that is never rented is exempt from this particular test.
“However, if that is exempt, any debt associated with that is also not included from that perspective. So super, main residence and any personal use assets are excluded.
“However, what could come back to the network are affiliate assets, so it’s important to consider who an affiliate is from that perspective. Then there’s the test of aggregate billings of less than $2 million. You can’t just design that into the year of the actual sale.
“They look at the current year and the prior year as well, and they also include connected entities and affiliates. Part of the budget measures was to change that test and increase it to $10 million, but that’s only for the active asset discount. That doesn’t apply if you want to be eligible for the retirement exemption, or for the 15-year exemption, or for the asset replacement rules.”