THE SMALL business capital gains tax concession was enacted more than 10 years ago. If applicable, a business owner's capital gain from the sale of a business can be CGT-free. However, the concession is not easily obtained because the relevant legislation is full of traps and trip-wires.
The concession was enacted in recognition that business owners often invested their profits into growing their businesses without saving for their retirement. Many owners believe that the value of their business represents their retirement nest-egg. Elements of the concession may require part of the capital gain made on the sale of a business to be contributed to a complying superannuation fund without the usual 15 per cent contributions tax being imposed.
Tax returns claiming the concession may be checked by a special group of people in the Australian Taxation Office. Penalties and interest apply if no entitlement exists. Tax would also be payable on the capital gain assumed to be sheltered from the concession.
So what is the best strategy to qualify for entitlement to the concession? The best approach is to ensure that the correct entity structure is chosen when the business is first established. This critical first step often determines eligibility to the concession.
Scarcely a year passes when I have to advise a business owner that a six figure CGT liability is payable because of inappropriate planning at commencement of business and time of sale. This could have easily been avoided by obtaining advice from an experienced tax adviser. Sometimes advice is not sought for fear of the cost which invariably is insignificant to the potential tax liability.
The next critical time to check that the traps and trip-wires will not apply is at the time of sale of the business. Before the sale, advice should be obtained to ensure eligibility to the concession.
Checking eligibility after the sale of the business, and when the relevant tax return is due, may be too late.
Even if the above planning has been done, wisdom dictates that the complex legislation is checked when the concession is being claimed in a tax return. The best defence for the possibility of an ATO review is to prepare a paper stating which provisions in the law apply to the circumstances of the business sale to support the claiming of the concession. Remember that the tax law places the onus of proof on the taxpayer when claiming any deduction or concession.
Michael Bannon is a tax consulting partner at Duesburys Nexia, Canberra