Question: How is CGT calculated when selling a property? Does the accumulated depreciation get added back when you sell? Therefore increasing the gross profit before applying the 50% discount and then added on to your normal wages? Answer: If you purchased the property after 13th May, 1997 depreciation claimable for the building reduces your cost base before applying the 50% discount. Let’s say the building depreciation was $10,000. The original costs base of the property was $100,000, selling costs were $5,000 and the property sold for $200,000 the calculation would be as follows: Original Cost $100,000 Add: Selling Costs $5,000 $105,000 Less: Building Depreciation Claimable $10,000 Cost Base $95,000 Selling Price $200,000 Capital Gain $105,000 Less: Any Carried forward Capital Losses 0 $105,000 Less 50% Capital Gains Tax Discount $52,500 Amount to be included in tax return $52,500 ie added to normal wages Note: in some circumstances you may have to reduce the cost base of the property by the building depreciation you could have claimed even though you didn’t.
Business CGT Concessions When you sell a small business you should expect to pay little or no capital gains tax. If you have a tax bill you are not utilising the business CGT concessions to the optimum. The concessions only apply to active assets. Active assets normally refers to Goodwill and buildings. Plant and equipment do not qualify as active assets nor is any profit made on them subject to CGT. Any profit made on the sale of plant and equipment over and above its depreciation value is taxed at normal rates. Individuals, Partnerships and Discretionary Trusts qualify for more concessions than Companies. Companies are not entitled to the 50% CGT discount and there are difficulties involved in getting the tax free portion of the active asset concession out of the company. You would have to look into liquidating a company to get the best CGT outcome. To qualify for the small business concessions the business and associates net assets have to be less than $6 million or elect to enter the simplified tax system which requires the turnover to be less than $2 million. Trusts and companies also have to pass a controlling individual test. Concessions: a) The 50% capital gains discount – only half of the gain is included in your taxable income. This concession is not available if the asset is owned by a company. Need to hold the asset for more than 12 months. Must use the capital gain to reduce any carried forward capital losses before applying the discount. b) The 15 year ownership exemption. This requires you to have held the asset for more than 15 years. The asset must be an active asset. You need to satisfy the controlling individual test if the asset is owned by a company or trust. The taxpayer or the controlling individual, if a company or trust, must also be over 55 and retire or be permanently incapacitated. Not only is the amount CGT free but it does not reduce any capital losses you may be carrying forward. c) Retirement exemption – can only apply to an active asset and the taxpayer or controlling individual must retire or put the funds into a superannuation fund. The gain is not taxed when it goes into the superannuation fund and the only limit is that you can only put $500,000 into superannuation this way, in your lifetime. When you retire the money comes to you tax free. d) 50% discount for active business assets – can only apply to an active asset. e) Rollover relief where an active asset can be sold and another active asset purchased up to a year before the sale or 2 years afterwards. These concessions can be used in conjunction with each other, for example: Gain of $100,000 Less 50% CGT Disc 50,000 50,000 Less 50% Active Asset Disc 25,000 25,000 Purchase A New Active Asset 25,000 Amount subject to CGT 0 The best strategy depends on the type of business entity and the owners future plans.
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