In Australia, Capital Gains Tax (CGT) was introduced on 20 September 1985. The tax was made applicable on assets which a taxpayer acquired on or after 20 September 1985. All gains or losses made before 20 September 1985 are termed as Pre-GST Gains / Losses and are ignored. Initially, the cost price of an asset, held for at least one year by the taxpayer, was indexed using the Consumer Price Index (CPI) and for calculating the gain / loss, the sale proceed was reduced by this indexed amount. The rule was applicable till 20 September 1999 and since then, individual taxpayers are allowed to use the 50% Discount Method, although the taxpayer holding an asset prior to 20 September 1999 has the choice of choosing the method which gives the maximum tax benefit, says Barkoczy, (2012). The Small Business Entity Benefits were made effective from 21 September 1999. These benefits, discussed in Part-2 below, were for small business owners who were retiring and wanted to dispose-off their active business assets. They could also apply for reducing tax liability in case they opted for a rollover in case they sold one active asset to buy another.
Capital Gains Tax is not governed by a separate income tax law but is covered under Section 104-5 of the Income Tax Assessment Act of 1997 (ITAA, 1997) and is explained through a set of 52 CGT events. Each event applies to a specific situation and evaluates the gain / loss. The most common of the events is Event-A1, which deals with the disposal of an asset, as per Barkoczy, (2012). The date applicable to determine the period of the gain / loss is the date of the contract even if the taxpayer receives the payment at a later date. In case there is no contract, then the date from which taxpayer stops use of the asset or when he ceases to be the owner. The Sale Proceeds and the Cost Base are evaluated after including any costs associated with the sale or purchase of the asset.
The law is applicable to all assets, known as CGT Assets except certain categories which are specifically exempted. It applies even to assets partially owned by the taxpayer and to the tangible and intangible business assets, asserts Cassidy, (2007).
PART – 2
The Australian Fair Work Act of 2009 has defined a Small Business Entity (SBE) as one which employs less than 15 employees and includes: Accountants, Advocates, Bakeries, Convenience Stores, Hairdressing Salons, Paying Guest Houses, Photography Studios, Restaurants and Small-Scale Trading / Manufacturing Units, Web Designers / Programmers. Apart from the number of employees, there are other criteria, as per Barkoczy, (2012), which should be used for classifying a SBE, such as Net Profit, Annual Turnover and Value of CGT Assets.
A SBE invests in assets and these costs are termed as Capital Expenses. These assets have long work life, which usually is more than an income year and their utility should be to establish, replace, enlarge or improve the structure of the business. In their utility, these assets are assigned an ‘effective life’ depending on their. The effective life declines in value over the work period of the asset. Such assets are generally known as ‘Depreciating Assets’, says Raftery, (2011) and some examples are:
- Carpet and Curtains
- Electrical Fixtures and Tools
- Motor Vehicles
- Plant and Equipment
Small Business Terminologies
SBE is an entity having aggregated annual turnover below $2 million and are eligible for a range of tax concessions under specific conditions. All eligible SBEs can choose all or one pf the available concessions as per suitability to their business, though these may be subjected to certain additional conditions. Moreover, every SBE has to check its eligibility for the concessions once every tax year, as per Nethercott, Devos & Richardson, (2010). A SBE can be owned by an individual, a partnership firm or a listed / unlisted company or a trust, provided it:
- Is carrying on a business for whole or part of an income year and
- Has an annual aggregated turnover of less than $2 million.
If we need to discuss the Capital Gains made by Julie from the sale of assets, goodwill and the total business of Suit making, which she ran for almost seven years (from May 2010 to May 2017), then we need to understand the implications of Capital Gains on a Small Business Entity. But before that, we need to make an assessment whether the business being run by Julie was eligible for being classified as a Small Business Entity, says Marsden, (2010). Once this criteria has been satisfied and complied with, then we can make an evaluation of the Capital Gains made by Julie and subsequently make suggestions to her about the various concessions which she can become entitled for being a Small Business Entity.
To become a SBE, an enterprise must fulfil the following factors:
- Net Asset Values must be below $6,000,000, including those owned by "Related entities".
- At least one "controlling individual" owning 50% of the capital or two such individuals, in case they own half each.
Julie fulfils both the conditions, hence the company owned by her can be termed as a SBE.
- 15-year Exemption
If the taxpayer is above 55 years in age and wished to retire or becomes permanently incapacitated and has owned an active business asset at least for 15 years, such taxpayer need not pay CGT upon disposal of any business asset, either by sale or gift or transfer.
Julie fails in this test, she is only 52 years of age.
- 50% Active Asset Reduction
If the taxpayer has owned an active business asset, than it pays tax on 50% of the capital gain upon disposal of the asset, asserts Taylor, (2001).
Julie qualifies for this exemption.
- Retirement Exemption
When the taxpayer is selling the SBE and is not over 55 years of age, CGT exemption is available on net capital gain if the same is deposited into a superannuation fund. However, every taxpayer has a lifetime limit of $500,000 for this exemption.
Julie is not eligible, as she does not intend to deposit the Net Capital gains into a superannuation fund, although she passes the age limit test.
The taxpayer is entitled to reduce the net capital gain made by the amount it invests in an alternate replacement asset. This actually is only a deferral of capital gain and the tax liability arises again when the replacement asset is sold or its use is changed, as per Marsden, (2010).
Julie can avail this concession as she invested a large portion of her capital gain amount into another investment asset.
Although Julie’s entity is a SBE and she is also entitled to avail a couple of SBE concessions on the disposal of the CGT Assets, we find from the calculations that after availing the Rollover Concession, Julie is left with a Negative CGT Asset amount. This means that she in fact invested more than what she got from the disposal of the SBE. Hence, Julie has no capital gains tax liability arising from the sale of the SBE.
Barkoczy, S. 2012. Foundations of Taxation Law, CCH, Sydney, NSW.
Cassidy, J. 2007. Concise Income Tax, 4th ed. Federation Press, Annandale, NSW.
Marsden, S. 2010. Australian Master Bookkeepers Guide, 3rd ed. CCH Australia Limited, Sydney.
Nethercott, L., Devos, K. and Richardson, G. 2010. Australian Taxation Study Manual: Questions and Suggested Solutions, 20th ed. CCH Australia Limited, Sydney.
Raftery, A. 2011. 101 Ways to Save Money on Your Tax -- Legally! John Wiley & Sons, Milton, Qld.
Taylor, L. 2001. Tax and You. Pascal Press, Glebe, NSW.