Not often we begin an article with a quote from children’s fiction, but here goes:
A person’s a person, no matter how small. ― Dr. Seuss, Horton Hears a Who!
So it’s ok to be small. In fact, if you’re in business of the small kind, it’s decidedly good. Even when you’ve had enough…
You’ve built up your business, watched it grow and flourish. And now the time has arrived to cash in your chips. You’ve decided to sell up, maybe even retire, or simply reinvest in another enterprise. But how can you maximise the fruits of your labour without seeing your windfall frittered away by the hungry hand of the tax man? Turns out avoiding his clutches may be easier than you think through application of the Small Business Capital Gains Tax (“SBCGT”) concessions.
Common knowledge among the Australian business community is the size of the contribution made to our economy, and indeed to our society, by the small business sector. Earlier this year, the Australian Bureau of Statistics reported:
Of the 2,238,299 actively trading businesses operating at the end of 2016-17, most (98% or 2,085,729) had annual turnover of less than $2m.
What is less well understood is the extent to which government supports those in small business, through incentives and concessions aimed at making small businesses easier to operate and more attractive to commence.
Much of this assistance comes in the form of compliance relief whereby regulatory burdens are reduced, eliminating ‘red tape’ and the frequency and detail with which small business are required to report their activities.
Under Australian tax law, small businesses are also entitled to tax relief not available to larger enterprises. In the 2018-19 income tax year for instance, companies with turnover of less than $50 million and assessable income of which no more than 80% is passively derived, can take advantage of a concessional income tax rate of 27.5% instead of the standard rate of 30% applicable to other companies.
The SBCGT concessions are a set of tax breaks available to small businesses which allow small business owners to avoid, defer or simply reduce their business’ tax liabilities where the business makes a capital gain by disposing of an asset.
The SBCGT concessions take four forms:
- Small Business 15-year exemption
- Small Business 50% reduction
- Small Business Retirement Exemption
- Small Business Roll-over.
In order to qualify for these concessions, you and your business must satisfy a set of basic conditions, some of which involve straightforward tests; others are inordinately complex.
In some cases, these benefits extend to business owners themselves. For instance, if you hold shares in a company that operates a small business and you decide to sell those shares, you may be eligible for tax relief in relation to the gain you make on the sale of those shares.
Parliament has recently tightened the special conditions that determine eligibility for the SBCGT concessions where the asset disposed of is a share in a company or an interest in a trust. The new rules require careful analysis of the activities and financial position of not only the entity in which the taxpayer holds the interest, but the taxpayer himself or herself, and any other entities in which the entity may have an interest.
So celebrate small and when you’re all done, grab hold of those tax breaks, boots and all!