CGT Small Business Concessions

CGT Small Business Concessions

Capital Gains Tax (CGT) relief is being provided in many countries worldwide. Australia is in the list of countries who like to support the people when financial assistance is required. CGT relief is only available for small business taxpayers who qualify after meeting a specific criterion. CGT relief is provided upon disposing certain assets. Majority of the people misunderstand concept of CGT small business concessions. There is a difference in CGT small business concessions and CGT discounting reliefs which are already being provided. This is a special concession relief for small business taxpayers and should be reflected in tax return Sydney.

Latest Offered CGT Small Business Concessions

Here is a list of different CGT concessions currently being offered by Government of Australia to its small business taxpayers:

  • 50% concession discount on all active assets plus the general individual 50% discount already provided
  • CGT retirement exemption which can be up to $500,000 capital gains
  • Complete exemption on gain of active assets which are held for at least 15 years in case you are 55years plus and retiring
  • In case of replacement gain, deferral of total capital gain

Qualifying for CGT Small Business Concessions

There are 3 basic conditions which you must be fulfilling in order to gain CGT small business concessions. We have briefly mentioned the 3 conditions below:

  1. Disposal of asset must raise capital gain
  2. Disposed asset can only be an active asset
  3. Business should be producing no more than $2 million turnover, or net value of the assets of entities linked with you plus your business assets must not be more than $6 million excluding your personal assets

Let us guide you in detail about the “disposal of asset” concept. You should be “Significant Individual” in the company or trust. It means that minimum 20% ownership belongs to you. Asset could be interest in a trust or a share of the company. In this case, you must have significant individual status or spouse of significant individual while having ownership interest.

Explaining The Active Asset Concept

It is important to understand what kind of assets can be considered “active”. Any business asset which is being used or stored for future usage purpose is known as an active asset. On the other hand, this asset can be included in goodwill of the owner. Some people get wrong idea of the concept. Assets leading to passive income are not considered active assets. Rent can be classified as passive income. To develop further understanding, you must have owned the asset for minimum seven and a half years or half the total time. This is a must condition for an asset to qualify for being an active asset.

Four Types of CGT Small Business Concessions

We have discussed the 4 types of concessions below. Remember, the basic conditions must be fulfilled in order to apply for any type of concession. Contact the professional CPA accountants Sydney for more assistance.

Exemption of 15 Years – You can apply for capital gain concession if owning a business asset or whole business for the time period of 15 years while you are about to retire at age of 55 years plus. For this type, permanently incapacitated individuals can also apply. For exemption purpose, it is a must for you to have owned the asset minimum seven and a half years. On the basis of 15 years exemption, the whole capital gain is completely disregarded.

Small Business Rollover – Gaining this type of concession requires you to purchase a replacement asset for active asset’s disposal within two year time frame. The individual might be allowed to defer capital gain till the time newly purchased replacement asset is disposed. Meeting the above mentioned condition is necessary.

50% Active Asset Reduction – This is a type of concession which can only be applied after finding that you don’t qualify for 15 year exemption. After gaining usual CGT discount, the capital gain which remains can be reduced to half which is 50% of the total. Companies, trusts and individuals can apply for this concession type. Just to remind, meeting the mentioned requirements is a must to gain this concession.

Retirement Exemption CGT – This is the type of concession which you must be looking forward to if you are 55 years plus. Gaining retirement exemption can ease the rest of your life. Capital gain amount will be left even after gaining usual 50% discount and availing the active asset 50% optional concession. You can eliminate the remaining amount by availing retirement exemption CGT. Government of Australia has set a $500,000 limit for an individual’s life time.

Contribute the amount of money into superannuation which is same to remaining capital gain amount. It will help you gain retirement exemption when you will be 55 years plus. This is an option for those who currently don’t meet the age condition. On the other hand, there are is no compulsion to submit any amount into superannuation if you meet the age criterion. If this is your case then simply choose to disregard the CGT which can be up to $500,000.

We have explained the conditions and types of concession in detail. However, we recommend you to consult your tax agent Sydney when you plan to go ahead for applying any type of CGT small business concession.

Commercial Debt Forgiveness

Commercial Debt Forgiveness

Debt forgiveness is a huge debate around the world. People all around the world are involved in some kind of debt payment such as private loans, credit card, mortgage, etc. To make the concept clear for you, we are going to discuss the key aspects of Commercial Debt Forgiveness. The process becomes complex when you start taking steps in real.

Any amount of debt is no more obligatory to be paid if you are freed from it. The process is called debt forgiveness. In Australia, the rules regarding debt forgiveness were defined under category of Commercial Debt Forgiveness in 1996. How does a debt become commercial? If some amount or the whole interest payable amount on debt would be allowable deduction then the debt becomes commercial. The rules stated in the law allow commercial debt to be forgiven in the order mentioned below:

  • Previous financial years revenue losses
  • Previous financial years net capital losses
  • Expenses deductible
  • Cost base of assets
  • Reduce cost base assets

The rules apply in all cases. You can consult your financial planner for the purpose of debt forgiveness. We are sure that the same rules will be mentioned by your planner. In only 3 cases these rules are not mandatory for debt to be forgiven. We have mentioned the 3 cases below:

  1. Will of deceased person
  2. Bankruptcy law action
  3. Natural case of love and affection

Deep Analysis of Debt Forgiveness

All the information mentioned in this article is based on Division 7A of law which was applied on December 4, 1997. There are different scenarios which could be the reason for commercial debt forgiveness to take place. We have discussed the possible scenarios below:

  • The creditor agrees to let you get rid of any obligation to pay the partial or full amount of debt. The obligations are waived, released or extinguished from the creditor’s side. The case is other than you paying partial or full payment of debt in form of cash or property, only then the case would qualify for debt forgiveness.
  • The creditor (private company) loses the right or case to sue debtor for partial or full amount of the debt due to limitation period finishing. In Australia, the government has decided limitation period to be for six years. However, if you live in the northern areas then the limitation period is only three years. When does the limitation period begin? The limitation starts from the date when case is filed for suing the debtor in order to recover commences. The limitation period can only be extended if debtor makes partial payment of debt or acknowledges extension.
  • Debtor gets into an agreement with the creditor (private company) where you are obligated to pay no amount and the debt will be forgiven at future date, excluding token amount. The creditor’s accounting records will still show the remaining debt amount. On the other hand, no debtor is allowed to make this agreement if the creditor does not agree.

Example Case – We have briefly discussed an example for you to understand the concept of Commercial Debt Forgiveness in a better way. After analysing the case, you will be able to have clear idea of the concept.

Adam Pvt Ltd is owed $100,000 by one of the shareholder named Alan. Both the parties get into an agreement in 2005-06 financial year. The agreement defines that Alan’s obligation towards paying the debt amount will finish when the financial year 2007-08 ends if Alan is able to make a payment of $1,000 on 30 June, 2008 to Adam Pvt Ltd. In this way, the corporation will go ahead and record debt amount of $100,000 in the books under the name “asset worth”.

When the arrangement is entered into the debt account, the debt of Alan for amount $100,000 is forgiven. Adam Pvt Ltd is taken to pay Alan a dividend amount of $100,000 on 30 June, 2006 which is due to the corporation’s distributable surplus. On the other hand, actual forgiveness of debt takes place on 30 June, 2008 but the amount has already been disregarded previously by treating it as a dividend.

Debt Parking Arrangement

It is a popular type of method used commonly in cases of commercial debt forgiveness. There are certain rules and criteria which have to be fulfilled in order to make this arrangement. Debt parking arrangement has been explained below.

Private company (creditor) transfers the right of receiving debt payment from debtor to a new creditor in majority of the debt parking cases. The new creditor can be someone you don’t know or your associate who agrees to be a part of arrangement. Either way, the purpose of transferring payment receiving right is that you won’t have to make any payments. For this reason, you must be sure that the new creditor won’t ask you to pay the debt.

Simplifying the whole process of commercial debt forgiveness; creditor is no more obligated to pay debt if it is waived, extinguished or released by creditor other than paying debt amount fully. On the other hand, debt could be forgiven if creditor transfers receiving right to another party. Lastly, debt is forgiven if the right to receive debt payment is ceased.




Business tax tips: When to buy new equipment

Business tax tips: When to buy new equipment

When the old financial year ends and a new financial year start in April, there are many things that come up in the minds of business owners. Usually small business owners that are this the right time to buy new assets or equipments by either replacing or buying new ones.

These questions regarding equipment purchase usually come in the mind during the Federal budget in May. In the budget incentives for the next financial year are declared. For the year 2012, it was announced that an instant write-off would be given to all the businesses that purchase assets up to $6500 per asset.

The main objective of government coming up with these incentive schemes is to increase the rate of spending. But before buying assets it is very important to look at our personal situation, do we have enough money to buy equipments and if we buy now would it have any future effects on our business.

If an individual has money, then in that case spending $6500 and then getting tax subtraction on $6500 in the same year is a boost up for the business, but spending it just for getting tax deduction is not the right decision.

Before you buy any equipment do check that your regular earning allows you to do so, and it is also important to know that if you spend would you be able to cope up with the other debts.

But if you have cash available as well as have plans to expand and develop your business then this is the right time to make the full use of this incentive and get instant tax write-off.

If you have old equipments & tools and feel that it is the perfect time to buy equipments of the latest technology, along with that having cash then it is the right time to buy them and take the full benefit of the tax deduction. Tax deduction helps you save a total of about $1950 in tax. (30%, which is to be paid on purchase of assets).

If there is a case that you have a business in which you are not in need of any equipment, but want to make the full use of the incentive, along with that also have cash to spend then I would suggest it is the right time for you to purchase them and get a reduction in the tax bill. But if an individual is buying something just to get tax reduction and does want to save any tax as well as does have any extra cash to spend then I would say that it is a bad idea.

If an individual wants to purchase new equipments then he has to decide whether he wants instant write-off on the full cost or wants to extend the reduction in tax over the years and for small businesses I would suggest that you can write it off together immediately rather than deducting it over a period. Rather than thinking anything it’s better to consult your accountant who will explain you about the current situation of your company and tell you whether you have enough money in spare to buy equipments.

Most of the financial planners also recommend that business owners especially the starters should not buy equipments just for tax deduction as it is not an ideal option for the future business plans. Under section 179, an individual can currently subtract up to a yearly total of the cost of the assets we purchase in that particular year. But there are some assets, which do not come under section 179, they are:

  • Real Estate.
  • Stock of something bought for resale.
  • Property including land, asset etc. which is brought from a relative.

But for the year 2014, the threshold limit under the section 179 has been reduced to $25000 the original limit and the main reason it was adjusted was for inflation. There has been a great decrease in the limit since the past few years, at some time the limit was about $500000 during 2010 to 2013. The main reason of its increase was to help out small business holders in a pressurized economy, and there also plans of it increasing the limits again, so do keep you updates to enjoy the benefits.

The bonus given to the entrepreneurs in the first year (2012-2013) is not available for 2014. This extraordinary incentive allowed reducing an extra 50% of the new eligible property purchased during that particular year. This subtraction was an extra incentive included in the section 179 of the Internal Revenue Code and gave small business holders an access to extra tax savings.

Along with these tips regarding tax savings when buying new equipments it is also important to know about some other tax deductions, they are as follows:

  • in subtracting expenses to start up or expanding your business and failing to subtract these expenses in the first year is a very big mistake.
  • it is also very important for an individual to have an understanding of his company’s financial condition, which is a part of the year end tax policy. Along with this always make sure that the account books are perfect and updated. Also spend some time with an accountant and take all his year-end advices for saving taxes.
  • Start buying assets for your business, which will be required in the future to increase tax reduction for that particular year.
  • do pay all the bills before the New Year starts; the rent, insurance etc.
  • do even check the stock of goods, which is damaged or has some issues. A decrease in the value of the stock of the goods can provide extra reduction in taxes.

So in the end, if you have cash and want to replace the old equipments with the new one, then this is the right time to purchase it and get a tax reduction of $6500. But before you plan to take any decision then do consult professional advice.