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Capital Gains Tax Exemptions Explained Posted on October 9, 2018
Business owners do not have to use all of the CGT exemptions – they can choose which ones they want to use.
The first and most valuable of the small business CGT concessions is the 15 year asset exemption. To be eligible for this exemption a person must have continuously owned and operated the business for at least 15 years, must be either over 55 and selling the business because they are retiring, or be selling the business because they are permanently incapacitated.
The 15 year asset exemption is valuable because there is no limit on the amount that can be claimed. The only limit applying to this exemption is the amount that can be contributed as a non-concessional tax-free super benefit. For the 2014 financial year the lifetime CGT limit is $1,315,000. If this exemption is used none of the other exemptions can be claimed.
If the 15 year asset exemption is not claimed one or all of the remaining three CGT concessions can be claimed. The first of these is the 50% active asset reduction. This CGT discount is claimed in addition to the 50% general CGT discount. If none of the other exemptions were claimed this results in tax being paid on only 25% of a capital gain made on the sale of a business.
The next concession available is the CGT retirement exemption that has a lifetime limit of $500,000. This means business owners can either claim the full $500,000 from the sale of one business, or they can progressively use this exemption on several business sales up to the maximum limit.
The limit imposed on the retirement exemption is one of the many examples of where its value has eroded over time. The $500,000 limit has applied since the concessions were introduced in 1999. For this concession to have kept pace with inflation since its introduction it should now be slightly more than $756,000.
If the business owner is under 55 years of age the retirement exemption must be contributed to a superannuation fund to receive the benefit of the exemption. Where the business owner is 55 or older the exemption does not have to be made a super contribution. From an income tax planning point of view it makes sense if the exemption is contributed due to the other limits that apply to superannuation contributions.
The final CGT exemption available is the rollover concession. Under this exemption tax payable on the capital gain on the sale of a business is effectively delayed. This is done by using it to decrease the purchase cost of a replacement active business asset. Once the replacement business asset is sold capital gains tax will be payable then.
The interaction of the small business CGT concessions, other than the 15 year exemption, means that a small business owner could make a capital gain of $2,400,000 on the sale of the business and pay no tax in the year the gain is made. This is achieved by claiming the 50% general discount, the 50% active asset discount, the retirement exemption of $500,000 and then $100,000 of CGT rollover relief.