If you’re a small business owner and sell an asset you’ve owned for at least 15 years before the sale, you may qualify for the capital gains tax (CGT) 15 year exemption rule. But to qualify for this exemption, you must meet stringent rules related to small business tax relief.
Under the 15 year exemption rule, you aren’t liable for capital gains tax provided you or the business:
1. Meet the basic conditions for CGT small business relief; and
2. Satisfy the CGT 15 year exemption rule.
Small business relief
To qualify for CGT small business relief, 4 conditions must be met:
1. A CGT event must happen to an asset you own. Typically, this is the sale of the asset, but it could also be a capital payment for shares, creating a trust over a CGT asset, transferring a CGT asset to a trust and ceasing to be a member of a wholly owned group after a rollover, among other events.
2. The CGT event would normally generate a capital gain.
3. The asset is classified as active for at least half of the period from the time it was acquired to the time the CGT event occurred. An asset is active if it is used in the course of carrying on business.
4. One or more of the following must apply:
- Prior to the CGT event, the net value of the CGT assets of your entity is less than $6 million. This must include any connected entities.
- The business is a small or medium business entity for the income year. Generally, this means it had aggregate annual turnover of less than $2 million.
- The asset is an interest in an asset of a small business partnership of which you are a partner. If the asset is a passively held asset, certain other conditions must be satisfied.
The CGT 15 year exemption rule
To satisfy the requirements of the 15 year exemption rule, the taxpayer must have owned the asset to be shed for the 15 years preceding the CGT event and:
- If the taxpayer is an individual, he or she must either be over the age of 55 at the time of the event and it must be related to retirement or the individual must be permanently incapacitated and no longer able to work.
- If the taxpayer is a company or trust, it must have had at least one “significant individual” for at least 15 years during which it owned the CGT asset. It does not matter if the significant individual is a different individual during the 15-year period.
A significant individual must hold 20% of the company or trust and either be older than 55, with the event related to retirement, or be permanently incapacitated at that time of the CGT event.
The rules for this exemption are complicated, particularly when it comes to passive and intangible assets. To find out how these rules may affect you, contact your Westlawn Business Services Accountant.
16 October 2013
Westlawn Business Services Pty Ltd provides this information for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers.
Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.