One of the benefits of having your own business is that on top of getting an income, selling it can set you up for a great retirement.

If you sell your business for more than what it cost you to buy or start, the Government taxes you on the profit. This is called capital gains tax (CGT). Generally, the tax is paid at your personal marginal tax rate, so if you are earning more than $180,000 (including any income as well as capital gains), the effective tax rate could be as high as 45 cents in the dollar. Ouch!

Luckily, for most businesses with an aggregated annual turnover of less than $2 million there are legal ways to help reduce the tax you pay down to zero. These include:

  • The 15-year exemption – If you have continuously owned the business for 15 years and you’re aged 55 or over and are retiring or permanently incapacitated, you can reduce the capital gain by 100%.
  • Holding an asset for more than 12 months – Individuals and small businesses can generally discount a capital gain by 50% if they hold the asset for more than 12 months.
  • 50% active asset reduction – If you have owned the business and it has been active for more than 12 months you can reduce the capital gain by 50% (in addition to the 50% discount above).
  • Retirement exemption – If you’re under 55, capital gains of up to $500,000 can be paid into a complying super fund or a retirement savings account.
  • Rollover – You can defer all or part of a capital gain for two years, or longer if you acquire a replacement asset or make capital improvements to an existing asset.

Let’s look at an example: Emma is 49 years old and started a consulting practice in 2012. It cost Emma $100,000 to start the business. This $100,000 is referred to as her cost base. After putting all her energy into it and working 60 hours a week she sells it in 2018 for $600,000. She has $350,000 in her low-cost industry super fund. She also has $50,000 left to pay off the family home.

Sale price $600,000
Cost base $100,000
Capital gain $500,000
12 month discount (50%) $250,000
Active asset reduction (50%) $125,000
Rollover to Emma’s super fund $125,000
Net capital gain for tax purposes Nil

After applying the concessions and contributing to her super fund, Emma doesn’t have to pay any CGT. As she has put $125,000 into her super fund, Emma now has $475,000 of the $600,000 left. Her financial adviser recommends she pay off the family home and put another $300,000 into her super fund. This will leave her mortgage free, give her around $775,000 in her super fund and leave her with $125,000 to invest, start another business or take that well-earned trip to Italy.

If you would like to discuss any of this information further, please contact Phil Harvey from Construct Wealth on 0417 034 252 or visit www.constructwealth.com.au