Many business owners are not sure of the issues and factors that cause CGT to be paid (or not paid), when a business is sold. The CGT legislation is structured so that the owner of a small business (who is well advised and uses an appropriate business structure) should never have to pay Capital Gains Tax on the sale of their business. Here are some points that help to simplify this area. Most income generating assets will attract Capital Gains Tax when sold, however a small business may be free of Capital Gains Tax (CGT) when it is sold- if certain conditions apply. Many business owners are unaware that if an operating business is sold for less than five million dollars, and it is owned by an individual, partnership, or a company, where an individual owns at least 50% of the business, or shares in the business, – the Capital Gains Tax liability will be halved.
If the owner qualifies for this 50% reduction and has owned the business for more than 15 years, the sale will be free of Capital Gain Tax. If a business is owned by individuals (not a company) for longer than twelve months, but less than 15 years, the Capital Gains Tax liability will be reduced by a further 50%. After the concession and discount is applied and the liability is established, a CGT liability can still be eliminated – if the operator is over 55 years of age, – as long as the gain is transferred to a (complying) superannuation fund, or if the operator reinvests the gain in another (similar) business within two years of the sale. Another way in which CGT may be exempt is in an “involuntary sale”. For example, if the business is to be sold as a result of a compulsory acquisition, or a marriage breakdown, as a result of an insurance payout – it is likely that no CGT will be applied. We often find that business owners (mistakenly) believe that they will have to pay CGT, when they have no Capital Gains liability. We always suggest that business owners seek advice from a competent accountant. A CGT liability is usually quite rare, and if there is such a liability it can be planned for in advance – so good advice is really valuable.
