Episode 65 - FS360 Podcast - Capital Gains Tax and Death

Speaking with Gavin Nash on the FS360 Podcast, Mulcahy & Co Ballarat senior accountant Nick Willowhite spoke about capital gains tax (CGT) and death in relation to small business assets.

A concept introduced in Australia in September 1985, CGT is the tax paid on any profit from the sale of an asset after September 1985.

Using the example of a house brought for $300,000 and sold for $500,000, Willowhite touched on a discount that is available on the $200,000 that will incur CGT.

“$200,000 gain, being at an individual level, if you’ve held it for longer than 12 months you get a 50% discount, which brings that down to $100,000,” Willowhite said.

“That net gain then gets added on top of your general taxable income. If your wage was $80,000, that lifts your taxable income up to $180,000 and you pay tax on that.”

It is different when it comes to an asset held in a company as opposed to an asset held by an individual. That includes potential CGT concessions for businesses.

“If you hold any asset in a company, there’s no discount at all, so you pay tax on the full gain. The difference there is that the company tax rate, if it’s a business entity and you’re eligible … you’ll be taxed (the base rate) of 25%, otherwise it’s taxed at the flat 30%,” Willowhite said.

“If the business is active … and maybe you own a shed that the work’s done out of … those assets are deemed active assets. If you go to sell them … there are some (CGT) concessions which they may be eligible for to reduce that gain and possibly pay no tax at all.

“The main (eligibility test) is that their business has a turnover under $2 million and that their net assets are under $6 million … you only have to pass one of those tests, so if you own over $6 million in assets but your turnover is under $2 million, you still pass the test.”

When it comes to potential concessions, options vary depending on the individual situation.

“There’s one that’s a 50% asset reduction which is an extra 50% cut in the capital gain … so your capital gain is only really 25% of what it was before,” Willowhite said.

“There’s a thing called the retirement exemption; if you’re below 55 you could put the net gain into super and get it tax free.

“If you’re over 55, you don’t have to put the money into super, you can just reduce the net gain using that exemption. There is a (lifetime) cap on that exemption of $500,000 though.

“Then you move onto the 15-year exemption … the asset must have been held for longer than 15 years and the sale needs to be linked with your retirement. After you sell the asset, hours worked needs to reduce and things like that.”

When it comes to the death of someone who owns assets, there are paths the beneficiaries could take to save themselves CGT.

“We see it a little bit with farm land, someone will own farm land, they pass away and then that farm land forms part of their deceased estate,” Willowhite said.

“The beneficiaries … sometimes they want to farm it themselves, other times they want to cash it in (and) sell the property.

“Generally, there would be capital gains payable on that sale, however if the deceased has farmed it previously as an active asset … we can possibly use those concessions to reduce the gain to zero or reduce the CGT.

“The biggest key is that you have to get it sorted within two years of date of death. Anything after that two-year period, the concessions are gone, there’s no further eligibility for them.”