What is a Capital Gains Tax (CGT)?
When you sell a tangible or intangible asset (eg. art, property, shares, patents), part of the profits gained may be taxed: this is known as Capital Gains Tax.The amount of tax that you pay may vary and depend on whether you have made any capital losses and/or gains in your income year. However, you may also be eligible for a Capital Gain Tax concession.
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A CGT event occurs when you sell an asset that’s tangible or intangible that may result in capital gain or loss. Examples of a CGT event common to a small business, include:
- Sale of shares: A sale of a company share is a CGT event.
- Disposal: If you dispose a CGT asset, it simply means you are selling or giving the asset away to someone else.
- Business Sale: A sale of a business will trigger a CGT event. This is generally incurred by the purchaser.
Examples of Small Business CGT Concessions
As an owner of small business or start-up owner, you might be entitled to keep a portion or all of your capital gains from your active asset. An active asset simply means that a tangible or intangible asset that you own passes the active asset test. You can take the active asset test here.
If you pass the active test, you may be eligible for tax concession:
Small business 15-year exemption
- If you own a business for 15 years and decide to sell it, you will be exempted from paying capital gain tax if you are over 55 years of age, plan to retire or if you’re permanently disabled.
Small business 50% active asset reduction
- If you have owned a business (active asset) for more than 12 months, you can reduce your capital gain tax by 50%.
Small business retirement exemption
- If you are selling a business you will be exempted for up to $500,000 in your lifetime. If you decide to retire under 55 years of age, the tax exempted amount needs to be paid into a superannuation fund or your retirement savings account.
Small business roll-over
- If you sell a business (active asset), you can defer a part or all of your capital gains tax for two years (or in some cases longer) if you acquire a replacement asset or incur expenses for making capital improvements on the existing business.
The ATO website provides more information for each of these concessions on CGT concessions for small businesses and also a tool to help you work out your CGT concessions.
Understanding CGT to raise capital for your new business from July 1 2016
From July 2016, start-up investors can benefit from the Capital Gain Tax concession when they sell their shares at a profit.This is a win-win situation for both start-ups and a tax incentive for risk-takers who want to take advantage of the new capital gain tax system.
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