
Common Mistakes When Claiming Small Business CGT Concessions—and How to Avoid Them
For many small business owners, selling a business asset often means facing a capital gains tax (CGT) bill that can be higher than expected if the rules aren’t followed closely. The Australian Taxation Office (ATO) offers a set of small business CGT concessions designed to reduce the tax you pay on a capital gain from the sale of your business assets. These business CGT concessions can make a significant difference to your assessable income, but the rules are detailed and easy to misinterpret. Understanding the most common mistakes can help you keep more of your funds and avoid problems with the ATO.
Understanding Small Business CGT Concessions
Before looking at the usual errors, it’s helpful to know what the small business CGT concessions are and how they can reduce the capital gains tax you might otherwise pay when you sell a business asset. These concessions are available to eligible small business entities and can apply to a range of business assets, including property, goodwill, and even depreciating assets in some cases.
The four main CGT concessions are:
The small business 15-year exemption, which allows you to disregard the entire capital gain if you’ve owned the active asset for at least 15 years, are aged 55 or over, and are retiring or permanently incapacitated.
The small business 50% active asset reduction, which lets you reduce the capital gain by half on the sale of an active asset.
The small business retirement exemption, which enables you to disregard up to a $500,000 lifetime limit in capital gains, provided the exempt amount is used according to the rules, such as contributing to your superannuation if you’re under 55.
The small business rollover, which allows you to defer all or part of a capital gain if you acquire a replacement asset or make improvements to an existing one within two years of the CGT event.
Each concession has its own additional requirements, but all start with the same basic conditions.
Basic Eligibility Requirements
To access these CGT concessions, your business must be a small business entity, which generally means having an aggregated turnover of less than $2 million or net assets not exceeding $6 million. The asset you’re selling must be an active asset, meaning it’s been used in your business (not just held as a personal asset or investment) for at least half the ownership period, or for at least 7.5 years if owned for more than 15 years. These basic conditions are the starting point for accessing the business CGT concessions.
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Common Mistakes When Claiming CGT Concessions
Mistakes in claiming small business CGT concessions can lead to paying more tax than necessary or facing penalties. Here are the most frequent issues we see.
Misunderstanding Eligibility and the Basic Conditions
A common error is assuming you qualify for the small business CGT concessions without checking all the basic conditions. For example, some business owners overlook the need for the asset to be an active asset, or they don’t realise that shares in a company must meet specific active asset rules. Others may not include connected entities and affiliates when calculating aggregated turnover or net assets, which can push them over the eligibility thresholds.
Not Including All Connected Entities and Affiliates
When working out if you meet the $2 million aggregated turnover or $6 million net assets tests, it’s essential to include all connected entities and affiliates. This includes companies, trusts, and individuals who are considered connected to your business. Missing these can result in incorrectly claiming CGT concessions when your combined circumstances mean you’re not eligible.
Errors in the Active Asset Test
The active asset test is a key requirement for most small business CGT concessions. The asset must have been actively used in your business for the required year period. Problems often arise when the asset has had mixed use, such as being partly a business asset and partly a personal asset. It’s important to keep clear records showing how the asset was used to support your claim.
Using the Wrong Date for the CGT Event
The date of the CGT event is critical for working out eligibility and the timing of the concessions. Many people mistakenly use the settlement date instead of the contract date when selling a business asset. This can affect whether the asset meets the active asset test and whether you qualify for the 15-year exemption or other concessions.
Incorrectly Calculating Net Assets
The $6 million net assets test requires you to include all your assets, including the asset being sold, at their market value. Common mistakes include using historical cost instead of market value, leaving out goodwill, or not deducting liabilities correctly. These errors can lead to an incorrect assessment of eligibility for small business CGT concessions.
How to Avoid These Mistakes
Avoiding these mistakes comes down to careful planning, good record-keeping, and seeking the right advice. Here’s how you can protect your business and your financial future.
Keep Detailed Records of Business Assets
Maintaining clear records of when you acquired each business asset, how it was used, and any changes in use is essential. This helps you demonstrate that the asset meets the active asset test and supports your claim for the small business CGT concessions.
Review All Connected Entities and Affiliates
Before making a claim, review your business structure and identify all connected entities and affiliates. This includes any companies, trusts, or individuals who may be linked to your business and whose assets or turnover must be included in the eligibility tests.
Get Professional Valuations When Needed
If you’re unsure about the value of your business assets or goodwill, consider getting a professional valuation. This is especially important for the net assets test, where market value is required. A professional valuation can also help if the ATO reviews your claim.
Seek Tax Advice Early
Getting expert tax advice before selling a business asset or triggering a CGT event can help you avoid costly mistakes. A tax professional can help you understand the additional conditions for each concession, such as the rules around the small business retirement exemption or the requirements for the small business rollover.
ACT Tax Group’s Approach to Business CGT Concessions
We know that understanding the rules around small business CGT can be overwhelming. Our team focuses on making the process straightforward and stress-free for you, so you can access the concessions you’re entitled to and keep more of your capital gains.
Proactive Planning for CGT Events
We work with you before you sell or restructure your business assets, helping you plan for the CGT event and assess your eligibility for each concession. This includes reviewing your business structure, checking the use of each asset, and making sure you meet all the basic conditions and any additional requirements.
Supporting You with Documentation
Our team helps you gather and organise the records needed to support your claim, whether it’s proving an asset was active, documenting the value of your net assets, or showing how replacement assets were acquired for a small business rollover. We make sure your paperwork is in order so you can feel confident in your claim.
Conclusion
Small business CGT concessions can help you reduce or even eliminate capital gains tax on the sale of your business assets, but only if you meet all the rules. By understanding the most common mistakes—like misinterpreting eligibility, missing connected entities, errors in the active asset test, using the wrong date for the CGT event, or incorrectly calculating net assets—you can take steps to avoid them.
The best way to protect your business and your financial future is to keep good records, review your circumstances carefully, and seek expert tax advice before you sell or restructure. If you’re thinking about selling a business asset or want to know more about how the small business CGT concessions apply to your situation, get in touch with our team. We’re here to help you access the right concessions, reduce your tax, and keep your business growing.
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