Tax with Max: Capital gains tax

How big can your small business get before you lose CGT concessions?

Summary: The CGT concession for small business remains capped at $2 million turnover even though the small business entity turnover test is set to increase to $10m from July 1, 2016 should the coalition take power.

Key take out: If you are eligible to make large non-concessional contributions to super this financial year, I would not put this off because of caution on the possible $500k cap on NCCs as proposed by the government. If the changes do go through, you’ll simply have to remove the excess contributions from super.

Key beneficiaries: General investors. Category: Tax. 

Practicalities of the $500k cap

There is a new limit for super of $500,000 for non-concessional contributions. I have heard that if I go over the $500,000 limit I have to withdraw the excess. Does that mean I must withdraw the extra amount I just put in or withdraw enough to get it down to the $500,000 total that applies from 2007?

This is crucial if it’s the latter. If I exceed the $35,000 concessional cap accidentally, for example contribute $36,000 instead of $35,000, the extra $1000 dollars would go in as non-concessional and could mean I have to withdraw all I have put in over $500,000.

If it’s the former, and the existing rules are I can put in $180,000 as non-concessional, should I just go ahead with that? The worst that can happen then would be I’d have to withdraw the $180,000.

Answer: If the coalition wins the election in just under two weeks time their retrospective limit on non-concessional contributions will apply. Under the measure where non-concessional contributions made since July 1, 2007 exceed the $500,000 lifetime limit they must be withdrawn. This means in your case, if you exceeded the concessional contribution limit by $1000 you would not need to withdraw all of the non-concessional contributions you made since budget night, but only the amount that exceeds the $500,000 limit.

If you are planning on making a $180,000 non-concessional contribution, and you are currently eligible to do this for the 2016 year, I would not put off making this contribution for fear of the new limit applying. If you have already exceeded the $500,000 lifetime non-concessional contribution limit, and you make the excess concessional contribution of $1000 and also the $180,000 non-concessional contribution, you would just need to withdraw these from superannuation if the coalition win the election.

Does my small business get a CGT concession?

I own a real estate agent business, have just turned 56, run the business under my own name, and am looking to retire. It has a turnover of over $2 million and I am hoping to sell the estate agency business for a gain on goodwill of $400,000 and net gain of $1,000,000 on the business office. Will I be eligible for the small business CGT concessions? I have a home on 5 acres valued at $2 million, four investment properties with a net value of $2 million after debt, an equity portfolio worth $1,500,000, and a balance in my SMSF of $2 million.

Answer: It was not surprising when the coalition brought down its 2016 federal budget, and increased the $2 million small business entity turnover test to $10m from July 1, 2016 with regard to tax concessions, that no change was made to the turnover test applying to the small business capital gains tax concessions.

This turnover test will remain at $2m for the foreseeable future despite the fact that it has applied since July 2007. At the time that the turnover test was increased to $2m the other test that can apply, of the net assets owned by a small business taxpayer, was increased from $5m to $6m.

As you unfortunately do not pass the turnover test you would still be eligible for the CGT small-business concessions as long as you pass the $6m net assets test. Under this test, apart from a few assets that are not included, the market value of a person’s assets must be below $6m.

The assets not included under this test are superannuation, a person’s home, and also properties that have been held for personal purposes and thus not had borrowings against them for investment purposes.

The process of working out whether you are eligible for the CGT small-business concessions, and how they would apply, starts with working out the net value of the asset you own counted under the test.

Had your home been on more than five acres some of its value could have been counted under this test. This is because the CGT main residence exemption only applies on land up to two hectares. If this had been the case a value would have needed to be applied to the excess land above the two hectare limit.

From what has been stated in this question, and excluding the assets not included under the test, the assets to be taken into account will be the selling value of your business and business premises, which would be added to the net value of your investment properties of $2m and your investment portfolio of $1.5m.

You have stated that you will be making capital gains on the goodwill of the sale of the business of $400,000 and $1m on the sale of the business premises. To work out whether you will pass the $6 million net asset test, the actual selling value of your business and the business premises would need to be less than $2.5m.

If you pass this test this will mean you can use the small business CGT concessions for any active assets being sold. As active assets include the goodwill of a business and business premises you could apply the CGT concessions to the $1.4m capital gain you will be making.

If you have owned and operated your real estate business for at least 15 years, and are planning to retire rather than continue working, you would be eligible for the 15 year CGT exemption. Under this exemption no income tax is payable on any gain made but there is a limit on how much can be contributed as a non-concessional superannuation contribution.

The lifetime limit currently placed on CGT concession amounts contributed to a superannuation fund is $1.395m. This amount is indexed each year so potentially the $1.4m capital gain that you will be making, if you use the 15 year exemption, could all be contributed as a non-concessional contribution to superannuation.

The other CGT concessions available to you include the 50 per cent active asset discount and the small business retirement exemption. Under these two exemptions the CGT 50 per cent general discount is claimed first and then the 50 per cent active asset discount can be claimed.

This means on the $1.4m capital gain $700,000 would be eligible for the active asset discount of $350,000, with the remaining $350,000 gain being exempt for tax using the retirement exemption. Due to the changes being made to non-concessional contributions, if the coalition government are re-elected, you should seek professional advice as to which of the CGT exemptions will best suit your overall position.

Company tax and franking

When company tax reduces to 25 per cent from 30 per cent will this mean the franking rate for dividends will also reduce from 25 per cent to 30 per cent?

Answer: Previously when the company income tax rate has decreased there has always been a corresponding decrease in the amount of the franking credit available to shareholders. This means although the decrease in company tax will increase the amount of after tax companies have to invest in their businesses, the decreased franking credit effectively results in an increase in tax payable by shareholders.

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