If you’re in business, then you will know tax is a way of life. Aside from income tax business owners also need to consider the consequences of the profit they make from selling assets they own. It is commonly referred to as Capital Gains Tax, even by the ATO, but in fact this description is slightly misleading. There is no separate tax on capital profits as they are taxed the same as income. Where there is a difference between normal trading income and the realization of a profit on an asset is in the tax concessions that are available.
A capital gains concession enables you to effectively discount 50% of the profit you make on realizing an asset. Given that capital gains profits are often the result of owning an asset for a period this helps reduce the impact of inflation and effectively recognizes the true profit achieved when comparing a sale in today’s dollars versus the purchase of the asset in yesterday’s money.
There are several additional concessions available for a small business owner depending on their circumstances. Among these are the following:
15 Year Concession. In the event that a business had held an asset for a period of 15 years, and provided that the owner of the asset is retiring or incapacitated, or it’s a company or trust that has had a significant owner involved who is retiring or incapacitated, then the profit on sale of the asset can be exempt. https://www.ato.gov.au/law/view/document?DocID=PAC/19970038/152-100
Active Asset Concession. There is a further deduction of an additional 50% in capital gains concession where the asset is deemed to still be active. There are a number of circumstances that must be met in order for this concession to apply. https://www.ato.gov.au/law/view/document?DocID=PAC/19970038/152-200
Deferment Concession. There are circumstances in which a capital gain may be deferred for a period of up to two years before tax must be paid on it. The main criteria for this surrounds the purchasing of a replacement asset or the reinvesting of funds in upgrading existing assets.
Retirement Exemption. What if you aren’t in the process of retiring just yet but have a capital gain from the sale of an asset? You may still benefit under the retirement concession provided you are planning for your retirement. If you are aged over 55, or intend to pay the proceeds into a retirement fund you may still be entitled to reduce the profit you account for tax purposes in certain circumstances.
These concessions are not mutually exclusive meaning you can apply all or as many of them to which you qualify until there is no gain left to account for. There is an order in which they must be applied if more than one exemption exists, so it’s important you understand this and follow it correctly.
This article is no substitute for sound tax advice and is only an indication of the areas where concessions may exist. Everyone’s circumstances are different, as is the interpretation on how the law can be applied to each individual, company or trust scenario. You must seek the advice of a competent professional before making any assumptions about the capital gains concession entitlements that may apply to your circumstances.
Make sure you get professional advice as this will help you understand your options.
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Taxation is a complicated area and this article provides a brief overview. The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a Financial Advisor or other finance professional.