Does your business pass the capital gains tax tests? Photo: Jim RiceOne of the ways governments increase their income tax take is through bracket creep. This is achieved by not increasing the marginal tax rate thresholds applying to individuals. As our incomes rise, due to inflation or economic pressures, a greater proportion of it is taxed at higher marginal tax rates.

Another form of bracket creep is achieved when thresholds applying to tax concessions do not increase in line with inflation. An example of this is the $500,000 small business capital gains tax retirement exemption. This has remained the same since it was introduced more than 10 years ago.

Q. I am a part owner with my wife in a business that is operated through a company. Between the two of us we own 25 per cent of the shares. As we are married do we satisfy the 20 per cent significant individual test and therefore can we claim the small business capital gains tax exemptions? 

A. Before a small business owner can access the capital gains tax exemptions there are several tests that must be passed before considering the significant individual test. The first and easiest to assess relates to the business itself, and that is whether it is classed as a small business entity. To do this it must have a turnover of less than $2 million. This turnover amount is another example of a threshold that has not increased since it was introduced.

When a business has an income turnover of more than $2 million the owners can still qualify for the small business capital gains tax exemptions if they pass a net assets test. You and your wife would pass this test if the value of your net assets, this is the market value of the assets after deducting borrowings related to those assets, is less than $6 million. The value of your house, superannuation, and property not used to produce income are not included in the $6 million limit.

If you qualify as a small business owner, the capital gains tax exemption will only apply to active assets. Active assets are those assets used in conjunction with the running of a business such as business real estate, fixed assets and the value of goodwill. The only time shares held in a company can be classed as an active asset is when 80 per cent or more of the company’s share value is made up of active assets.

The final test you must pass to qualify for the small business capital gains tax exemptions is the significant individual test. When a small business is operated through a company or a unit trust an individual must have control of at least 20 per cent of the entity owning the business. As you and your wife each hold 12.5 per cent of the shares neither of you will qualify as significant individuals. If you had held 20 per cent of the shares, and your wife had held five per cent, you would have both qualified as significant individuals.

Questions on small business tax or other issues can be emailed to [email protected]杭州夜生活

The original release of this article first appeared on the website of Hangzhou Night Net.

Categories : 杭州龙凤


Comment are closed