By MAX NEWNHAM
(Sydney Morning Herald)
The taxation of capital gains differs between individuals and companies. Individuals who own an investment for longer than 12 months are able to discount the profit made by 50 per cent to arrive at the amount that is taxable. If a company sells an asset, no matter how long it has owned the asset, company tax is paid on the full amount of the profit made.
Q. I recently read your recent article about owning a business through a company and the issue of not being entitled to the capital gain concessions. If a qualifying small business is owned by a private company what happens if the owners sell the shares in that company instead of the company selling the business? Are they entitled to the capital gain concessions?
A. The small business capital gains tax concessions applying to a business owned by a company are still available when the shares in the company are sold instead of the business being sold. To work out whether the small business capital gains tax concessions apply in this situation the following steps must be taken.
The first thing is to establish is whether the concessions apply because the business has been classed as a small business entity. For this to happen the turnover of the business in a financial year, or part thereof when a business is started part way through a financial year, must be less than $2 million.
If a business is not classed as a small business entity its owners can still apply the small business capital gains tax concessions when they have assessable assets of less than $6 million. Assets not included under this test are a person’s home, a property for which no tax deduction has been claimed for interest on a loan taken out to purchase it, and superannuation.
Once it has been established the owners of the business are eligible for the concessions the next step is to pass the active asset test. An active asset is an asset that is used in the conducting of a business that is either tangible, such as fixed assets and real estate, or intangible such as goodwill.
In addition for an asset to be classed as active it must have been used in the conducting of a business for at least half of the period of its ownership when it is owned for less than 15 years, or for 7.5 years if it is owned for more than 15 years.
When the owners of a company that operates a business that has qualified for the capital gains tax concessions sells the shares in the company, rather than the company selling the business, they can still qualify for the small business capital gains tax concessions.
When at least 80 per cent of the value received for shares is made up of active assets the small business capital gains tax concessions apply to the shares. This would mean as long as 80 per cent of the selling value of the company was made up of active assets, and not passive investments, all of the small business capital gains tax concessions will apply.
Questions on small business income tax and other issues can be emailed to firstname.lastname@example.org
Max Newham is the founder of www.smsfsurvivalcentre.com.au