Every dollar you can save on tax is another dollar you can reinvest into your business or use to help boost your retirement savings.
In recent years, capital gains tax (CGT) has been made much friendlier for many small businesses, both in terms of the available concessions and who can access them. However, you need to start thinking now about how to position your business to take greatest advantage of the CGT rules, even if you are not currently considering the sale of your business – planning ahead is critical.
Previously, most of these CGT concessions were only available to businesses with net assets that did not exceed $5 million in value. But now, this threshold has been increased to $6 million and an additional $2 million turnover test has been introduced as an alternative option. So, satisfaction of one threshold could make you eligible for the concessions even if you breach the other. For example, a business with assets worth more than $6 million, but with a turnover that is less than $2 million, may qualify.
Thinking of selling – time it right
If you are planning to sell your business, an important consideration is the potential CGT liability arising from the sale, so timing your sale is of the essence.
There are a range of CGT concessions available to eligible small business owners. However, probably the most significant tax break under the CGT rules is that certain business assets may be deemed to be completely CGT-free when they are sold after being held for 15 years and meet other eligibility criteria, including that the business owner is either over 55 and retiring or permanently incapacitated.
Alternatively, where an active business asset has been held for less than 15 years, there will be an automatic 50 percent reduction of any gain made – where relevant conditions are met – as well as a further potential discount of 50 percent under the general discount. On top of this, business owners may also qualify for the $500,000 retirement exemption to further reduce or eliminate their capital gain.
Minimise the CGT you pay on investments
When calculating the value of assets for CGT purposes, make sure all relevant costs of acquiring the asset (purchase price, capital improvements, stamp duty, legal costs, advertising expenses and commission fees) are taken into account to ensure the assessment is as low as possible.
Depending on how a business is structured, there may also be a general 50 percent discount where assets are sold after having been owned for more than 12 months.
Review bad debts
If you are carrying bad debts, it’s a good idea to review them now. If you decide that you are not going to be paid these amounts that are owed to you, consider writing them off before 30 June as in certain circumstances they may be tax-deductible in the current financial year. Otherwise, you will have to wait until next year for the deduction.
Business owners should also consider the benefits of bringing forward upcoming expenses so they can be claimed as deductions in this financial year. Now might also be a good time for people to review their insurance cover and pre-pay some insurance premiums in a lump sum for the year ahead, such as income protection and key person insurance which may be fully tax-deductible.
Think about other costs that may be on the horizon. Other possible costs that could be brought forward include workers’ compensation insurance premium instalments, staff bonuses or office supplies.
Pay the Super Guarantee before 30 June
It’s common for many business owners to forget that if they don’t pay employee superannuation contributions before 30 June, they can’t claim them as deductions in the current financial year and will need to wait until the next year to benefit from the deduction.
Crystallise tax losses
Given the poor performance of the share market in the past few years, plenty of people will have shares that are currently at a loss. If you’re expecting a CGT bill, it might make sense to crystallise those losses and use the losses as an offset against capital gains for tax purposes.
Tax advantage of super tax breaks
As a small business owner, superannuation offers you significant tax breaks. Superannuation contributions made from pre-tax income are 100 percent tax deductible for the self-employed, so if you’ve got a big tax bill coming up it could be a good time to set some money aside for a rainy day. A self-employed person claiming a tax deduction for super contributions can significantly reduce their tax liability on their income from business sources, investments or even capital gains.
There are some limitations on the contributions that can be made including: you have to be under the age of 75; you cannot earn more than 10 percent of your income from other employment; there is a cap on contributions of $25,000 a year for people under 50 and $50,000 for those over 50.
– Fabian Bussoletti is a Senior Technical Analyst for AMP.