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Capital Gains Tax Concessions for Small Business Entities

   

Added on  2019-11-08

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INCOME TAXPART – 1CGT HistoryIn Australia, Capital Gains Tax (CGT) was introduced on 20 September 1985. The taxwas made applicable on assets which a taxpayer acquired on or after 20 September1985. All gains or losses made before 20 September 1985 are termed as Pre-GSTGains / Losses and are ignored. Initially, the cost price of an asset, held for at least oneyear by the taxpayer, was indexed using the Consumer Price Index (CPI) and forcalculating the gain / loss, the sale proceed was reduced by this indexed amount. Therule was applicable till 20 September 1999 and since then, individual taxpayers areallowed to use the 50% Discount Method, although the taxpayer holding an asset priorto 20 September 1999 has the choice of choosing the method which gives the maximumtax benefit, says Barkoczy, (2012). The Small Business Entity Benefits were madeeffective from 21 September 1999. These benefits, discussed in Part-2 below, were forsmall business owners who were retiring and wanted to dispose-off their active businessassets. They could also apply for reducing tax liability in case they opted for a rolloverin case they sold one active asset to buy another.OperationCapital Gains Tax is not governed by a separate income tax law but is covered underSection 104-5 of the Income Tax Assessment Act of 1997 (ITAA, 1997) and isexplained through a set of 52 CGT events. Each event applies to a specific situation andevaluates the gain / loss. The most common of the events is Event-A1, which deals withthe disposal of an asset, as per Barkoczy, (2012). The date applicable to determine theperiod of the gain / loss is the date of the contract even if the taxpayer receives thepayment at a later date. In case there is no contract, then the date from which taxpayerstops use of the asset or when he ceases to be the owner. The Sale Proceeds and theCost Base are evaluated after including any costs associated with the sale or purchase ofthe asset.Exemptions
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The law is applicable to all assets, known as CGT Assets except certain categorieswhich are specifically exempted. It applies even to assets partially owned by thetaxpayer and to the tangible and intangible business assets, asserts Cassidy, (2007).PART – 2CAPITAL GAINS – SMALL BUSINESS CONCESSIONSThe Australian Fair Work Act of 2009 has defined a Small Business Entity (SBE) asone which employs less than 15 employees and includes: Accountants, Advocates,Bakeries, Convenience Stores, Hairdressing Salons, Paying Guest Houses, PhotographyStudios, Restaurants and Small-Scale Trading / Manufacturing Units, Web Designers /Programmers. Apart from the number of employees, there are other criteria, as perBarkoczy, (2012), which should be used for classifying a SBE, such as Net Profit,Annual Turnover and Value of CGT Assets.Capital ExpensesA SBE invests in assets and these costs are termed as Capital Expenses. These assetshave long work life, which usually is more than an income year and their utility shouldbe 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 lifedeclines in value over the work period of the asset. Such assets are generally known as‘Depreciating Assets’, says Raftery, (2011) and some examples are:oCarpet and CurtainsoComputersoElectrical Fixtures and ToolsoFurnitureoMotor VehiclesoPlant and EquipmentSmall Business TerminologiesSBE is an entity having aggregated annual turnover below $2 million and are eligiblefor a range of tax concessions under specific conditions. All eligible SBEs can chooseall or one pf the available concessions as per suitability to their business, though thesemay be subjected to certain additional conditions. Moreover, every SBE has to check itseligibility for the concessions once every tax year, as per Nethercott, Devos &
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Richardson, (2010). A SBE can be owned by an individual, a partnership firm or a listed/ unlisted company or a trust, provided it:oIs carrying on a business for whole or part of an income year andoHas an annual aggregated turnover of less than $2 million.CASE STUDY OF JULIEIf we need to discuss the Capital Gains made by Julie from the sale of assets, goodwilland the total business of Suit making, which she ran for almost seven years (from May2010 to May 2017), then we need to understand the implications of Capital Gains on aSmall Business Entity. But before that, we need to make an assessment whether thebusiness 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 wecan make an evaluation of the Capital Gains made by Julie and subsequently makesuggestions to her about the various concessions which she can become entitled forbeing a Small Business Entity.To become a SBE, an enterprise must fulfil the following factors:A.Net Asset Values must be below $6,000,000, including those owned by "Relatedentities".B.At least one "controlling individual" owning 50% of the capital or two suchindividuals, in case they own half each. Julie fulfils both the conditions, hence the company owned by her can be termed asa SBE.SMALL BUSINESS CONCESSIONS1.15-year ExemptionIf the taxpayer is above 55 years in age and wished to retire or becomes permanentlyincapacitated and has owned an active business asset at least for 15years, such taxpayerneed 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.2.50% Active Asset Reduction
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