There are a number of CGT concessions available to small businesses that have incurred a capital gain from an active asset.
It is permissible to claim as many of the concessions as you are entitled to until your CGT liability has been reduced to zero. The available exemptions are:
The 15 year exemption
If your business has held the asset for over 15 years and you are aged over 55 or are permanently incapacitated, then you will not attract a CGT charge when you dispose of the active asset.
The 50% active asset reduction
The capital gain on an active asset can be reduced by 50% and can be used in conjunction with the 50% discount available for assets that have been held for over 12 months.
Retirement exemption
If you are over 55, or direct the capital gain directly into your superannuation, then you can claim CGT exemption on active assets. There is a $500 000 lifetime limit on this exemption.
Small business rollover
The small business rollover allows you to defer part or all of your CGT liability until a later year if you have purchased a replacement asset or have incurred costs making improvements to an existing asset.
According to the ATO, there are some recurring mistakes that small businesses make when applying the eligibility tests for these concessions. Two mistakes that have been identified as particularly common are:
Miscalculating maximum net asset value
To be eligible for the small business CGT concessions mentioned above, a number of conditions must be met. One of these is that immediately prior to the CGT event the net value of the entity’s CGT assets cannot exceed $6 million.
The net value of CGT assets is calculated as the total market value of its assets less any liabilities relating to those assets. Liabilities may include provisions such as tax liability and long service leave.
The most common errors relating to calculating the net asset total are failing to include assets owned by connected entities and affiliates, valuing the assets retrospectively instead of at market value and not including the value of the asset being sold in the calculation.
Using the settlement date
A CGT event is typically considered to occur on the date that the contract is entered into, not the date of settlement.
The ATO has found that it is a regular mistake that occurs when business owners record CGT events. Incorrectly recording the settlement date instead of the contract date can lead to complications including the asset not being considered as active for the relevant time frame and incorrectly applying the 15 year exemption.
CGT losses and gains should be included in the financial year that the contract was signed.