The Division 152 CGT concessions can deliver substantial tax savings for small business owners, but a single oversight can result in losing them entirely.
Background
The Division 152 small business capital gains tax (CGT) concessions are among the most generous provisions in the Australian tax system. For eligible business owners, they can eliminate or significantly reduce capital gains tax on the sale of active business assets.
However, the rules are complex, highly technical, and unforgiving. Even small errors, such as miscalculating asset values or failing to document superannuation contributions, can disqualify a claim entirely.
This article outlines common strategies for maximising the concessions, as well as the traps that regularly catch out taxpayers and their advisers.
Maximising the Concessions
- Plan Early
Eligibility and structuring decisions must be addressed well before a business sale. Early structuring ensures sale agreements are drafted to protect your eligibility to the concessions and maximise benefits. I regularly advise sellers before they enter into a sale agreement to ensure the documents are properly drafted to maximise the entitlement to the CGT concessions.
- Check the Basic Conditions
The small business entity test or maximum net asset value test must all be satisfied and eligibility for each must be confirmed, as failure at any stage can disqualify the claim.
- The ATO has disallowed claims where taxpayers failed the $6 million net asset value test due to missing assets, not accepting valuations and disallowing certain liabilities.
- The $2 million turnover test can be failed where the sale of stock is included in turnover, pushing it above $2 million, even if normal annual turnover is lower.
- Superannuation Contribution
The retirement exemption allows up to $500,000 of capital gains to be contributed to superannuation tax-free. There are very strict rules around documentation required and timing of payments.
Common Traps and Pitfalls
- Related Entities and Affiliates
The net asset value test aggregates assets of connected entities and affiliates. Overlooking these connections can push you over the $6 million threshold.
- Trusts and Significant Individuals
For trusts and companies, at least one “significant individual” (20% interest) is required. You must be very careful in how income is distributed from the trust to not fail this test.
Key Takeaways
- Plan well in advance: eligibility can’t be fixed after the sale.
- Test eligibility from all angles: entity, asset value, and turnover.
- Document super contributions meticulously: timing is critical.
- Account for related entities: the $6 million test applies across the group.
- Review trust distribution patterns: protect “significant individual” status.
Conclusion
The Division 152 small business CGT concessions are powerful, but the rules are complex and highly technical. Each step, from early planning to final documentation, must be handled with precision. At Vale Legal, we specialise in structuring transactions to safeguard eligibility and ensure clients extract the full tax-free benefits available.
If you or your clients are planning a business sale, contact me before contracts are signed to ensure that tax-free proceeds are maximised.
