When the Capital Gains Tax system was introduced nearly all of the concessions were available to individuals, while companies and unit trusts effectively received no concessions. The 50 per cent general discount that individuals receive, on assets owned for more than 12 months, was not available to companies or unit trusts.
Eventually the 50 per cent general CGT discount was extended to unit trusts, while companies still do not receive the 50 per cent general discount. Companies and unit trusts are also disadvantaged when it comes to the 50 per cent active asset small business CGT discount.
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If a unit trust claims the discount this results in a tax-free distribution to the unit holders, but as untaxed unit trust distributions reduce the cost of the units purchased, a higher taxable capital gain is made when those units are sold.
In a company the small business active asset discount can be claimed, which results in the company not paying tax on that part of the gain, but when the gain is distributed to shareholders as a dividend tax is paid the full value of the dividend without the benefit of an imputation franking credit.
Q. I am 49 years old, have run a swimming pool service and retail business through a company structure for 12 years, and had an unexpected offer to sell my business for $750,000. Although my business turnover is more than $2 million I will be eligible for the small business concessions as my personal assets are under $1 million.
I intend to start another business through a trust and therefore do not plan to use the roll over concessions available. Is it possible to reduce the capital gains tax payable on the sale of the business by the company to nil by using the 50 per cent active asset exemption and pay the balance of $375,000 into a super fund under the retirement exemption?
A. Although you can reduce the income tax payable by the company on the sale of the business to nil, you as the shareholder will pay tax on the 50 per cent active asset discount.
The $6 million net assets test that you are passing, because your personal assets are worth under $1 million, includes the value of your company and other assets owned by your family. Not included in those assets is your home, non-income producing properties, and superannuation.
If you claimed the small business active asset exemption of $375,000 in your company this results in untaxed accumulated profits, and when distributed to you results tax being paid on the entire discounted gain as an unfranked dividend without the benefit of the 30 per cent imputation credit.
The best way to minimise the income tax payable on the gain would be to claim the small business retirement exemption up to the $500,000 limit, and not claim the active asset discount. Before taking action you should seek advice from an accountant that specialises in this area as there a number of strategies that could benefit you.
Questions on small business income tax and other issues can be emailed to max@taxbiz.com.au. Max Newnham is a partner in the accounting firm TaxBiz Australia and founder of www.smsfsurvivalcentre.com.au.
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