Item 2: Capital gains tax
Generally, capital gains tax (CGT) is a tax charged on capital gains that arise when you sell or dispose of assets you acquired after 19 September 1985 (post-CGT assets), minus any capital losses.
There are exceptions where pre-CGT assets become subject to CGT – see 2.5 Event K6 for more details.
You need to consider your CGT liability when selling any asset.
For more information, refer to:
2.2 Calculating a capital gain
To calculate a capital gain, refer to:
You can also read information on the capital allowance rules relating to the disposal of a depreciating asset. This information includes how to:
- account for the disposal of a depreciating asset
- offset a balancing adjustment amount against a replacement depreciating asset.
2.3 Small business concessions
There are various CGT concessions available to small business owners. Correctly applying these concessions may reduce your CGT liability when selling a business.
For more information, refer to Capital gains tax (CGT) concessions for small business - overview.
Specific concessions include the:
- 15-year exemption that may exempt a capital gain from a business asset you have owned for at least 15 years
- 50% active asset reduction that allows you to reduce the capital gain arising from the sale of a business asset
- retirement exemption that allows you to receive relief from CGT if you sell assets called active assets used in your business – the exemption does not apply to gains made from passive (investment) assets
- rollover that allows you to defer a capital gain from the disposal of a business asset for two years (you can defer the capital gain for longer than two years if you acquire a replacement asset or make a capital improvement to an existing asset).
For detailed information about small business CGT concessions, refer to the Advanced guide to capital gains tax concessions for small business.
For more information about CGT, visit Capital gains tax essentials.
Broadly, an earnout is an arrangement where you:
- sell an income-producing asset – for example, a business
- agree to make some portion of its purchase price a function of the performance of that asset in a defined period after completing the sale.
For tax purposes, you can treat an earnout as a separate asset that may have separate CGT implications (including the small business CGT concessions).
For more information about how to treat earnouts, refer to Draft Taxation Ruling TR 2007/D10
2.5 Event K6
CGT event K6 can result in capital gains if certain CGT events happen to be pre-CGT who owns:
- shares in a company, and/or
- interests in a trust.
This may mean your pre-CGT assets become subject to CGT.
2.6 Buy or sell agreements
A buy or sell agreement sets out an arrangement designed to protect the interests of the departing owners and the remaining owners, while preserving the business itself.
There are two key features to a buy or sell agreement:
- the transfer aspects of the transaction
- the funding arrangements.
The features of the buy or sell agreement may raise additional tax issues, such as CGT.
For more information about how to treat buy or sell agreements, refer to ATO Interpretative Decisions:
2.7 Cap election
You need to complete the Capital gains tax cap election if contributions have been made to your super fund during the financial year, from the disposal of certain small business assets.
This is important if you:
- want to exclude these contributions from the non-concessional contributions cap
- have not reached your $1 million CGT cap amount (this amount is indexed on an annual basis and rounded down to the nearest $5,000).
2.8 Rollover statement
Under tax law, you must provide certain information to a super fund when an individual (including a sole trader or partner in a partnership), company or trust rolls over an eligible termination payment consisting of a CGT-exempt component to a super fund.
You do not have to use this form but it can help you:
- with record keeping
- facilitate the rollover process.
A CGT-exempt component is made up of the proceeds of the sale of certain small business assets in connection with retirement.
Complete the Capital gains tax cap election.