If you made a capital gain from a CGT event that happened after 11.45am on 21 September 1999 (such as disposing of a CGT asset), you may be able to reduce the capital gain using either or both of the following:
- the CGT discount
- one or more of the four CGT concessions available for small business.
CGT discount
You may be eligible to use the CGT discount to work out your capital gain if you owned the relevant asset for at least 12 months.
The CGT discount is not limited to capital gains from business assets.
If you are an individual (including partners in partnerships) or a trust, the discount lets you reduce your capital gains by 50%. There are more rules for beneficiaries who are entitled to a share of a trust capital gain. The discount for complying super funds is 33.33%.
Companies cannot use the CGT discount.
When to apply the CGT discount
You apply the CGT discount after offsetting your capital losses against your capital gains, but before applying the small business CGT concessions (apart from the small business 15-year exemption).
Small business CGT concessions
The following four CGT concessions are available only for small business.
- The small business 15-year exemption provides a total exemption for a capital gain on a CGT asset if
- you have continuously owned the asset for at least 15 years
- the relevant individual is 55 years of age or over and retiring or is permanently incapacitated.
- The small business 50% active asset reduction provides a 50% reduction of a capital gain.
- The small business retirement exemption provides an exemption for capital gains up to a lifetime limit of $500,000. If the individual is under 55 years of age just before they make the choice, the amount must be paid into a superannuation (or similar) fund.
- The small business rollover allows you to defer all or part of a capital gain on a business asset for a minimum of two years. If you acquire a replacement asset or make a capital improvement to an existing asset within the period allowed, the gain is deferred until you
- dispose of the replacement or improved asset
- change its use in particular ways.
In this case, the deferred capital gain is in addition to any capital gain you make when you dispose of the replacement or improved asset.
How the CGT concessions work
To be eligible for any of the concessions, you must first meet several basic conditions, which are outlined in step 1.
You must then meet any additional conditions that apply specifically to the individual concessions.
You can apply as many concessions as you are entitled to until the capital gain is reduced to nil. This choice allows you to achieve the best tax result for your circumstances.
There are rules about:
- the order you apply the CGT small business concessions
- any current year or prior year capital losses
- the CGT discount.
See the flowchart.
You may be able to apply either or both of the following to each capital gain:
- more than one of the four concessions if you meet the conditions for each
- the CGT discount if it also applies.
If the small business 15-year exemption applies, you can disregard the entire capital gain and, therefore, you do not need to apply any further concessions.
If you have more than one capital gain you can choose the order in which to reduce capital gains by capital losses.
The small business CGT concessions do not apply to gains from depreciating assets.
Applying the CGT concessions to a capital gain from a small business asset
The flowchart shows the order in which you apply capital losses and the CGT concessions to each capital gain.
You do not necessarily have to go through each step. For example, if you qualify for the small business 15-year exemption, you:
- can disregard the entire capital gain
- do not need to complete the remaining steps.
Also, you can choose not to apply the 50% active asset reduction and go straight to the small business retirement exemption or rollover.
Choosing the concessions
The way you prepare your tax return is evidence of the concessions you have chosen to use except if you are choosing the retirement exemption. If you choose that concession, you must make the choice in writing.
Generally, you need to make your choice by the latest of:
- the day you lodge your income tax return for the income year in which the relevant CGT event happened
- a later day allowed by the Commissioner.
If you became eligible for the concessions because of the June 2009 amendments, you may have more time to make your choice.
Throughout this guide we use the scenario of Lana, a sole trader, to illustrate how losses and the CGT concessions can be applied to a capital gain made by a small business entity.
Sole trader scenario
Lana operates a small manufacturing business as a sole trader. The net value of her CGT assets and those of certain other entities is less than $6 million.
Her husband Max carries on his own florist business, which is unrelated to Lana's manufacturing business.
They regularly consult with each other in relation to their respective businesses and act according to the other's directions or wishes in relation to their respective businesses.
Max owns the land and building from which Lana conducts her manufacturing business and leases it to her.
Max owns 100% of the shares in Maxaco Pty Ltd and Lana has no involvement in this company.
Lana has also owned a small parcel of nearby land for three years and has used it in her business for the last two years. She decides to sell the land and makes a capital gain of $17,000 when she disposes of it.
In the same year as Lana makes the $17,000 capital gain on the sale of the land, she also makes a capital loss of $3,000 from the sale of another asset.