There are very few concessions when it comes to capital gains tax. The most well-known is the exemption from capital gains tax for a person’s home. When a business is operated from home, and all of the tests are met to allow a claim for property costs such as interest and rates, the exemption from capital gains tax is lost for that part of the property used by the business.
Q. My wife and I have run a small manufacturing business from home for 20 years. We have now sold our home and business for $800,000 and our solicitor wants us to tell him how much to put in the contract for the sale of the business. What will give us the best tax result?
A. The first thing you will need to do is work out what portion of the property relates to the business and what can be regarded as your residence. This will need to be done on an area basis based on the actual use of the land. The maximum area that can be claimed under the residence exemption is two hectares.
Once you have worked out what the value of the home and surrounding land is the balance of your sale proceeds will relate to the business and the land it occupies. To calculate the value of your home you must either have evidence to support how the calculation was done or have it valued.
The balance of the sale proceeds relating to the business will need to be split between the value of the land and buildings it occupies, the value of any stock of materials being sold with the business, the value of business plant and machinery, and the value of the goodwill.
From an income tax point of view you should value the stock at cost and the plant and equipment at written down value. By doing this no tax should be payable on these components of the sale proceeds, unless the value used for stock on your previous tax return was understated.
The capital gains tax made on the sale proceeds relating to the business property will depend on what the cost of the land was and the cost of any improvements made. Improvements could include earthworks and the cost of the building used by the business.
The gain made on the property is combined with any proceeds received for goodwill. If your business is owned by you personally, or through a partnership or a trust, you will be able to decrease the total gain made by the general 50 per cent discount. In addition if you qualify as a small business entity you will also be able to claim the 50 per cent active asset discount.
No tax will be payable on the balance of the capital gain made, after the various discounts, by claiming the small business retirement exemption. If you are under 55 the retirement exemption amount will need to be contributed to a super fund, if you are over 55 you will be able to keep the retirement exemption amount.
Questions on small business tax or other issues can be emailed to firstname.lastname@example.org. "Tax for small business, a survival guide", by Max Newnham is available in bookstores and as an ebook.