Claiming small business CGT concessions: Mid 2021 update

Small Business CGT Concessions

Claiming small business CGT concessions: Mid 2021 update

The Government continues to tighten the eligibility rules for claiming tax concessions relating to small business capital gains tax (CGT) obligations. Of particular note are new rule changes impacting businesses letting out investment properties.

If you qualify, these concessions can have a big impact on how much of the profit from the sale of a business asset you get to keep, and how much goes to the tax man.

Ruling tightens eligibility

Selling an income-producing asset such as property, business equipment or shares at a profit, will create an assessable capital gain. This capital gain is then used to calculate your CGT obligation, which forms part of your annual income tax bill.

Business owners are permitted to use several tax concessions to reduce CGT, but the eligibility rules can be tricky to navigate.

A new tax determination (TD 2021/2) has further tightened them by clarifying that companies carrying on a business whose only activity is renting out an investment property are not eligible to claim the CGT concessions when the property is sold.

Small business and CGT

The four small business CGT concessions are in addition to the normal 50 per cent general discount on CGT when you have owned an asset for more than 12 months.

Generally, the concessions apply to any asset your business owns and eventually sells at a profit, provided your annual turnover is under $2 million.

The four small business CGT concessions are:

1. The 15-year exemption exempts the capital gain generated on a business asset you have owned for at least 15 years. The sale proceeds can then be contributed into your superannuation account (up to the relevant contributions limit). If you don’t qualify, you can still use the normal 50 per cent CGT general discount first, then use any of the remaining small business concessions for which you qualify.

2. The 50 per cent active asset reduction allows you to reduce any capital gain from the sale of an active business asset.

3. The retirement exemption applies if you sell an active business asset to retire, with a CGT exemption up to a lifetime limit of $500,000. If you are aged under 55, your profit must be paid into a complying superannuation fund. This exemption cannot be used for capital gains from passive investment assets.

4. The rollover concession can be used to defer your capital gain from the disposal of an active business asset to a later financial year. You must buy a replacement business asset or make a capital improvement to an existing asset to qualify.
If your business turnover is over $2 million but under $10 million, you may be able to use the small business restructure rollover concession. This permits the transfer of active assets – including CGT assets, trading stock and depreciating assets – from one business entity to another without incurring an income tax liability.

Qualifying for CGT concessions

You can apply for as many of the four special CGT concessions as you are entitled to. In some situations, this can reduce your capital gain to zero. Before applying, you need to meet the basic eligibility conditions for the CGT concessions.

Put simply, you must satisfy four basic conditions applying to all the concessions and then check if you meet the additional eligibility rules applying to each CGT concession.

The first condition requires you to be either a small business entity (SBE) with an aggregated turnover of less than $2 million; not carrying on a business but have a ‘passively-held asset’ used in the business as a connected entity; a partner in an SBE partnership; or satisfy the maximum net asset value ($6 million) test.

In addition, the business asset you are disposing of must satisfy the active asset test. If the asset is a share in a company or an interest in a trust, it must meet additional conditions.

The final step covers assets related to membership interests in a partnership. Each step must be considered in the set order before moving to the eligibility criteria for the individual concessions.

If you plan to take advantage of these concessions, ensure you check the qualifying requirements carefully – or speak to us – as the process is quite complex.

If you would like more information about the tax implications surrounding the disposal of your business assets, call us today.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Making a gift of real estate to family members. Warning about tax implications.

What Do You Need to Know Before Gifting Real Estate?

Making a gift of real estate to family members. Warning about tax implications.

What Do You Need to Know Before Gifting Real Estate?

Are you considering gifting real estate property to a family member? Transferring a house or other property to family members can have various benefits, but there are some nasty pitfalls you’ll want to avoid.

Giving property to your heirs while you’re still alive may sidestep the probate process. Property transfer can also be part of an asset protection strategy.

But giving property to someone else can have financial and tax implications. Here’s what you need to know before transferring real estate ownership.

Can You Give Real Estate as a Gift?

Under Australian law, you can give real estate to a relative as an outright gift. When giving ownership to a third party, there is no exchange of money. The gifting process involves filing a Transfer of Land with your title office. Filing a gift deed may also be necessary.

In some cases, property gifting takes place as a sale. For instance, if you want to give a family member a house but need to cover costs, they can buy the property at a discounted price.

Who Should Be on Title for Property Gifted to Family Members?

When buying a property, you receive a Certificate of Title. This document outlines your rights and responsibilities as the property owner. When you sell or gift the property, the government will record the change on the property title. This official record contains all property details, including:

  • Ownership
  • Mortgages
  • Easements
  • Covenants
  • Caveats

After the property title transfer, your family member will be the owner of the property.

Is Gifted Real Estate Taxable?

Australia doesn’t have a federal gift tax for:

  • Cash gifts
  • Charitable gift donations
  • Immovable property

However, real estate may be a taxable gift. Depending on the type, location, and value of the property, the new owner may be liable to pay:

  • Stamp duty
  • Land tax
  • Absentee owner surcharge
  • Vacant residential tax

The new owner’s tax obligations depend on the relevant state’s tax laws.

What are the Tax Implications of Gifting Property?

Before you transfer ownership of a property, understanding the tax consequences is critical.

Capital Gains Tax

From a tax perspective, capital gains can impact your financial situation. You need to pay capital gains tax (CGT) as part of your income tax assessment when disposing of a property. In other words, the proceeds from the sale form part of your taxable income.
In a sale, the capital gain is the property’s purchase price minus the selling price. If the property is a gift, the capital gain is the property’s fair market value minus the purchasing price.
When gifting a house, the Australian Taxation Office (ATO) assesses the capital gains tax bill using the market value on the transfer day. A professional valuer can determine the property value using objective and verified data.
In some cases, property owners can avoid capital gains tax. You can eliminate or reduce CGT if you are transferring:

  • Your primary residence
  • Investment property
  • Small business premises
  • Property you purchased before September 20, 1985

A rental property can be your place of residence. Under the temporary absence rule, the property remains your place of residence if:

  • You didn’t vacate the house for longer than six years and
  • You lived in the house for at least twelve months before moving out

Stamp Duty

Australian states levy stamp duty on a transfer, even if the property is a gift. Contrary to popular belief, stamp duty is not a one-off payment. Under tax law, buyers need to pay stamp duty on all property deed transfers.
Stamp duty falls under state tax. For example, in New South Wales and Queensland, you can transfer an interest in property to your spouse without paying stamp duty. You also don’t need to pay duty if, after the transfer:

  • You and your spouse own the entire property as joint tenants
  • The property is your permanent place of residence

Before beginning the transfer process, it's best to seek financial advice to learn more about the laws in your state.

Other Considerations When Transferring Property to Someone Else

Pension Payments

The consequences of gifting a house may extend beyond taxes. Before transferring a property to a child, elderly parents need to consider the impact of the transfer on their pension payments.
Centrelink assesses the income from a transfer using the property’s value and not the actual selling price.
For example, suppose you give a house with a value of $250,000 to your children. Even if you sell the property for $100, Centrelink will assess the proceeds from the sale as $250,000. In this case, you may lose your pension payments.

Home Loans

If the property you transfer has a mortgage over it, your relative has to take over the loan. Before commencing with the transfer, the lending institution holding the mortgage needs to approve the new owner.

Costs

In addition to taxes, various fees may apply to a property transfer. You may need to pay for an independent valuation that you will need when filing your taxes. You will also likely need to pay a solicitor to:

  • Provide you with legal advice
  • Draw up the necessary agreements and transfer documents
  • Transfer property titles

Before gifting a house to a relative, consider any additional costs carefully. You also need to ensure that the new owner can afford costs, such as the stamp duty.

Contact the Estate Planning Experts in Australia!

At House of Wealth Property Tax Experts, we can assist you in all matters relating to real estate taxes. We can provide you with professional advice and structure your taxable estate to lower your tax burden.
Are you planning on giving real estate to a relative as a gift? You may be eligible for an income tax deduction or federal estate tax exemption. Using our tax planning service, you can rest assured that you are not paying a cent in unnecessary tax.
Our other services include portfolio management, real estate tax accounting, and Centrelink advice. If you are looking to give real estate to a relative, contact us today to schedule a free consultation.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


How Can I Avoid Paying Capital Gains Tax in Australia?

How Can I Avoid Paying Capital Gains Tax in Australia?

Avoid problems and penalties by understanding how capital gains are taxed, what is exempt, and what happens if you fail to pay capital gains tax on time.

If there is one thing most people have in common, it's a desire to save on their taxes. Unfortunately, the Australian tax code can be confusing, especially when it comes to capital gains tax. This tax can sneak up on you if you aren't prepared for it, resulting in an unexpected bill at the end of the tax year. Luckily, exemptions offer a way to offset capital gains if you know how to use them to your advantage. Let’s look closer at how capital gains tax can affect Australians and foreign residents and what you can do to reduce your taxable income.

What Is the Capital Gains Tax in Australia?

Introduced in September of 1985, the capital gains tax or CGT works much like income tax. When you dispose of an asset, you can do so at a loss or make money based on the asset's original value or purchase price.

If you made money, also known as realizing a capital gain for tax purposes, this profit becomes a portion of your income for the year that you have to pay tax on. In other words, the capital gains tax is more like an additional tax on an individual's income than a separate tax. You may want to reserve a portion of your realized gains to account for the capital gains tax owed in the year of your increased income tax assessment.

The capital gains tax applies to:

• Business, investment, or gifted real estate
• Major capital improvements
• Businesses
• Investment shares, including stocks and bonds
• Collectibles
• Personal use assets
• Cryptocurrency

When you dispose of a taxable resource, taxes are incurred in the year you see a profit. On the other hand, if you report a capital loss, you can't apply that loss to reduce your assessable income or marginal tax rate. However, you may be able to reduce your net capital gain by using capital losses to offset your total capital gains. Likewise, don't forget to deduct capital costs.

As you can see, determining how your asset sale affects your taxable income can be complex. A tax professional can help you calculate your short- and long-term capital gains or losses and understand your income tax rate.

How Do I Avoid Paying Capital Gains Tax in Australia?

There is no surefire way to get out of paying for realized capital gains. Even if you give away assets or sell them for below market value to a friend or family member, one of you can expect to owe the Australian taxation office some money.

Luckily, you may not owe the government every time you see a capital gain, and the amount you owe may decrease the longer you hold onto the asset. For example, holding investment property for over 12 months can result in a 50% reduction in taxable gain.

Like most aspects of the Australian tax code, the capital gain tax has some legal exemptions. For example, you can exclude the disposal of your primary residence when calculating the CGT. Other exemptions that may work in your favour include:

• Personal effects, such as furniture or a car
• Any asset acquired before September 1985
• Depreciating assets such as business equipment or rental property fixtures
• Any assets held in superannuation funds until you retire

It's best to consult with a tax expert regarding capital gain exemptions before filing.

Why Should You Care About the Australian Capital Gains Tax?

Ultimately, everyone has to pay taxes, but understanding how to offset capital gains could mean paying less. By making your capital asset portfolio work for you without subjecting sales or transfers to capital gains tax provisions, you can realize greater retention of your capital gains. Of course, tax advice is helpful along the way, so it is best to wait until you talk to your advisor before making any changes with your investment property or capital assets.

Don't forget the impact capital gains can have on your heirs or beneficiaries. Without the correct ownership structures in place, inheritors of property incur substantial CGT liabilities when they sell an inherited property.

When Are Taxes Due for a Sale of Property or Shares?

You pay capital gains tax in the same year that the asset sold. For instance, if you sell investment properties, the date of the sale and price you agree to determine your cost base, even if you don't see net capital gains until the following year.

It may seem straightforward, but juggling capital losses and taxable capital gain may get confusing when you have multiple transactions taking place in a similar time frame. Working with an expert you trust can help you calculate capital gains tax to avoid penalties down the road.

What If I Don't Pay my Taxes on Time?

Any time you fail to file a tax return on time, you risk facing penalties. Interest may also accrue, increasing the amount due. It would be a shame to lose your property investment and any subsequent capital gain to penalties because you missed a tax deadline.

What Happens to Me if I Don't Pay My Taxes on Time?

The Australian Tax Office (ATO) will work with you to establish a repayment plan on any outstanding capital gains taxes. It's in your best interest to reach out to them or respond to their communication. The longer you wait to settle taxes on capital gains realized, the more penalties may accrue.

If the ATO doesn't hear from you, they may refer your debt to a collection agency. Ongoing failure to pay your taxes can also lead to legal action, seizure of assets, and even bankruptcy proceedings.

Get Help From the Property Tax Experts in Australia!

At House of Wealth Property Tax Experts, we understand the current capital gains tax policy and how to best help you retain your net gain, regardless of your regular income. Our goal is to help you reduce your CGT exposure and see the greatest benefits of your investment strategies. Contact us today to schedule a free consultation.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


What is the Market Value for the Small Business CGT Concessions

Syttadel Holdings Pty Ltd sold a CGT asset, the Spinnaker Sound marina at Sandstone Point, in August 2006 for $8.9 million.

Syttadel had acquired the asset, comprising land, buildings, marina berths, goodwill and plant and equipment, in June 1996 for $1.675 million.

The venture was not initially profitable but by 2006 its net profit was $280,306. The majority of the revenue was earned from the hiring of wet berths and dry storage and some income was received from the lease of commercial premises within the marina and the sale of fuel.

Mr Godden, a director and member of Syttadel gave evidence about several enquiries and offers to purchase the marina over time. One, at $2.5 million was made in 2004 – it was rejected because the proposed purchaser wanted vendor finance. The first ‘serious offer’ was made in mid-2005 and was for $3.7 million. A written offer of $4 million was made by the same prospective purchaser in February or March 2006. It was not accepted as Mr Godden ‘was hoping for a price closer to $4.5 million’.

Whilst these dealings were taking place a consortium led by a local real estate agent enquired at what price Mr Godden would be prepared to sell. He replied ‘$9 million’, which response he said was made ‘tongue in cheek’ with the figure of $9 million being ‘completely over the top’.

The consortium negotiated with Mr Godden and a written contract for the sale and purchase of the marina at $8.7 million was executed in early December 2005. The purchaser, World Housing Corporation Pty Ltd, ultimately failed to complete the transaction and forfeited its deposit.

After that Mr Godden had further dealings with the local real estate agent which led to the execution of a new contract, dated 4 July 2006, by which Spinnaker Sound Joint Venture Pty Ltd agreed to purchase the marina as a going concern for $8.9 million. The contract was completed on 14 August 2006.

Syttadel submitted a private ruling request to the Commissioner in November 2008 requesting that the Commissioner rule that, despite the sale at $8.9 million, the market value of the marina was in the range of $4 million to $4.5 million so that Syttadel would be eligible for the small business CGT concessions. The Commissioner ruled on 25 November 2008 that the value of the asset was its sale price and that Syttadel did not qualify for concessional capital gains tax treatment.

Syttadel objected to the ruling, but by then an assessment had issued, and the Commissioner treated the objection as being one against the assessment. The Commissioner disallowed the objection.

The Tribunal mentioned that both parties made reference to the passages from Spencer v The Commonwealth (1907) 5 CLR 418 where Griffith CJ said,

In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring ‘What would a man desiring to buy the land have had to pay for it on that day to a vendor will to sell it for a fair price but not desirous to sell?’

and where Isaacs J said

To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding
features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.

The Tribunal also noted that the parties agreed that the market value of the land had to take into account the highest and best use of the land.

The Tribunal had been provided with two valuations, one for the company where the value was set at $4.5 million, and one for the ATO where the valuer had originally set a value of $6.3 million but revised that down to $5.3 million.

The Tribunal were unprepared to accept the $4.5 million valuation figure as the Deputy President did not agree with the valuation methodology employed. The company’s valuer had set the value as being the value at which the vendor would be prepared to sell, and justified this by valuing the component parts of the marina using capitalization rates of 9% and 12%. The ATO’s valuer by contrast had used capitalization rates of 6% which the Deputy President considered ‘appropriate rate having regard to the market evidence and the potential for future growth but taking account the generally poor condition of the marina’. The ATO’s valuer had also supported their valuation by using comparable sales data.

As the Tribunal was unprepared to accept the company’s valuation it held that the small business CGT concessions would not be available.


Capital Allowances and Impact on Capital Gains Tax

Many people ask how capital allowances impact on the calculation of the capital gain when disposing of a property.  Capital allowances are covered by Division 43 of the Tax Act.  Effectively this allows someone to claim a write-off for the building construction costs over a period of time.

If a taxpayer is selling an investment property that was acquired after 13 May 1997 then they must reduce the cost base of that property by any Division 43 capital allowances that they have claimed.  If a capital loss is made on the sale of an investment property the reduced cost base must generally be reduced by any Division 43 capital allowances that the taxpayer was entitled to claim regardless of when the property was acquired.

If a taxpayer is selling an investment property that was acquired on or before 13 May 1997 the cost base of that property will only be reduced where the deductions relate to improvement expenditure incurred after 30 June 1999 and which is included in the fourth element of the cost base.

It is important for people selling investment properties that if capital allowances have been claimed the vendor is required to provide the purchaser with a written notice containing information that will allow the purchaser to calculate the remaining capital allowances.  The vendor needs to consider this as part of the sale if the building commenced construction after 26 February 1992.  This notification must be provided within 6 months after the end of the year of the income in which the property was sold or penalties can apply for the vendor.  This is something frequently overlooked by both parties.

If the taxpayer has not claimed the Division 43 capital allowance they are however required to reduce the cost base by the amounts they could have claimed regardless of whether they have been claimed or not by virtue of s110-45(2) of ITAA 1997 and s 110-45(4) of the ITAA 1997. Taxation Determination TD 2005/47 also deals with this issue http://law.ato.gov.au/atolaw/view.htm?docid=TXD/TD200547/NAT/ATO/00001. This is something which is frequently identified during audit and can result in penalties and interest if the taxpayer or their accountant have not identified this during their calculation of the capital gain.

However the ATO does provide a concession to not reduce the cost base where

  • the taxpayer does not have sufficient information to determine the property’s construction expenditure ; and
  • the taxpayer does not seek to claim any deduction for the capital allowance.

PS LA 2006/1 does not require the taxpayer to obtain a depreciation schedule to determine the amount of any eligible claim however as noted above as the vendor is required to provide the purchaser with notification of any remaining capital allowances to be written off then many times this information will be available for the taxpayer and the concession will not apply.  As with all aspects of tax law the devil is in the detail and House of Wealth can deal with your clients property investment and the tax related consequences can assist in dealing with this area of tax law.