When businesses enter transactions that involve assets there are likely to be Capital Gains Tax (CGT) issues that need to be considered. Relevant transactions may be relatively simple to identify, such as the sale of an asset, or more complex, such as rights to use an asset.
Further, small business taxpayers may be eligible to various small business CGT concessions that may reduce, eliminate or defer the CGT payable on the transaction.
The access to, and application of, these concessions is complex. The Australian Taxation Office has advised details of the common errors made by taxpayers in applying the small business CGT concessions.
The most common mistake is the taxpayer not meeting the maximum net asset value test, this is one of the basic conditions to be satisfied in order to gain access to the concessions.
In order to satisfy this test, the total value of CGT assets must not exceed $6 million at the time when the CGT event occurs. The CGT assets are those held by the taxpayer, any connected entities and any small business CGT affiliates.
Common mistakes in assessing the maximum net asset value test include:
- Valuation of assets at historical cost rather than market value
- Not including the CGT asset sold in the calculation
- Not including the goodwill asset in the calculation
- Failure to identify connected entities and small business CGT affiliates.
Other common mistakes in applying the concessions themselves include:
Using settlement date rather than contract date as the date of the CGT event.
- The active asset test not being passed due to the asset not being active for the required period of time
- Applying the 15 year exemption when the asset has not been held for that period
- Using replacement assets that do not meet the relevant conditions.
Taxpayers are encouraged to seek appropriate professional advice for assistance in dealing with these concessions and the application of CGT on their transactions.