What is the CGT Rollover Relief?
The Australian Tax Office (ATO) recognises small businesses’ important role in the economy. As such, they provide many small business tax concessions to help the success of their operations. These concessions include simplified depreciation rules, a reduced company tax rate, and access to capital gains tax concessions.
The capital gains tax concessions, in particular, are an invaluable tool as they can potentially save small business owners thousands of dollars, which they can use to reinvest in growing their enterprise or pay down debt.
The most widely-known concession is the 50% active asset reduction, which applies to assets held for more than 12 months. But there are quite a few other concessions that you could use to (legally) reduce your tax bill, including the small business 15-year exemption, the retirement exemption, and the capital gains tax (CGT) rollover relief.
In this blog post, we’ll take a closer look at the CGT rollover relief and how it can benefit you.
What is Capital Gains Tax?
Capital gains tax is a tax payable on the profit you realise from the sale of certain kinds of assets, including:
- Company shares
- Trading stock
- Real estate
- Business assets
- Units in a unit trust.
Investors and business owners will typically trigger this tax when a CGT event arises. There are various scenarios that the ATO classifies as a CGT event, such as the sale of an income-producing investment property.
But for business owners specifically, the Income Tax Assessment Act suggests that there are a few scenarios you’re likely to come across that will incur capital gains tax, including the following circumstances:
- Disposal of an asset
- Receiving compensation after the loss, theft or destruction of an asset, such as through an insurance policy
- Creation of an asset, such as a contractual right
What are Small Business Capital Gain Concessions?
If you own a small business, certain CGT concessions may apply to you if you decide to dispose of or sell any CGT assets or the business itself. These concessions can reduce the tax you pay on your business assets.
To be eligible for the concessions, you must satisfy several conditions, including being a small business entity:
- with a turnover of less than $2 million each year, or
- with assets that total less than $6 million, and
- selling an active asset
An active asset is one that you use for business purposes. For the ATO to consider an asset as active for CGT purposes, you must have owned it for:
- more than 15 years and used it for business purposes for at least half of those years (i.e. at least 7.5 years); or
- 15 years or less and have used it for business purposes for a minimum of half those years.
If you meet the eligibility criteria, you may be able to access one or more of the following concessions:
- The 15-year exemption:
- the retirement exemption;
- the 50% active asset reduction; and/or
- the CGT rollover relief
What is the Rollover Relief and How Does it Apply to a CGT Asset?
The CGT rollover relief can benefit businesses looking to defer or disregard a capital gain or loss. With this relief, businesses can choose to roll over their gain or loss for up to two years if they buy a replacement asset or improve an original asset.
Essentially, the rollover relief allows you to omit the capital loss or gain from your assessable income.
There are two types of CGT rollovers:
- Replacement asset rollovers: Allows you to defer your capital gain or loss from one CGT event until another occurs if you purchase replacement assets.
- Same asset rollovers: Allows you to completely disregard the capital gain or loss from a CGT even if the same asset is involved. For example, let’s say you’re selling an asset to a related entity, such as from a partnership to a wholly-owned company. In that case, you won’t have to pay CGT now and when the related entity disposes of the asset.
Example: Replacement Asset Rollover
Ethan is a videographer and runs a small business filming video content for digital marketing agencies, weddings, and corporate events. He has to maintain a considerable amount of video equipment, including his cameras, lighting, and computers, which he uses to conduct all the necessary editing.
He is in a position now where it’s time to replace quite a bit of his equipment. So he decides to sell each depreciating asset he has on a second-hand platform and purchase all the new equipment he needs.
After speaking with a tax consultant at KNS Accountants and Business Advisors, he meets all the conditions to qualify for the CGT rollover relief, the 50% CGT discount and the 50% active asset reduction.
Ethan can defer his remaining capital gain until another CGT event occurs, but he must ensure that he replaces his equipment within two years. If not, he will have to pay capital gains tax after the two-year period ends.
If you plan to sell your small business assets, you may be eligible for CGT rollover relief. This concession allows you to defer paying capital gains tax on the sale of these assets until another CGT event occurs, provided you either replace the asset within two years or improve it.
This relief can be extremely helpful in managing cash flow and ensuring that businesses can invest in growth opportunities.
But capital gains tax is a relatively complex area of law, especially regarding the various types of CGT events that can occur when running a business. If you’re in a position where you think you might trigger CGT liability, it’s in your best interest to seek professional advice from a tax accountant.
KNS Accountants and Business Advisors have a team of experienced and qualified tax professionals who can help you with capital gains tax and using the ATO concessions in the most effective way possible.