As reported in the Australian Financial Review recently, the Australian Taxation Office is targeting SMEs, including franchised businesses, which claim the small business capital gains tax concessions following the sale of business assets.

The ATO's 2010-11 compliance program indicates that it will be using specific reviews to identify businesses that may have incorrectly claimed these concessions.

Given the complexity of small business CGT concessions, it is little wonder that the ATO has identified this as an area in which taxation liabilities have been understated.  Whilst the majority of small business owners who sell business assets are unlikely to be deliberately avoiding their CGT tax obligations, the complexity of the rules makes it easy to understate the taxable capital gain in error, especially if you have not sought proper advice from tax advisers.

The small business CGT concession can be extremely generous. It is even possible to totally exclude the capital gain arising from the sale of your business assets. However, qualification for the concessions is subject to numerous conditions, thresholds and exclusions, which can make it extremely difficult to determine if you qualify.

The small business CGT concessions include:

• A 15-year exemption
• An active asset 50% reduction
• A retirement exemption
• Replacement asset rollovers

If one or more of these concessions apply to your capital gain, you may be able to significantly reduce the capital gains tax you pay.

The main conditions needed to qualify for the CGT concessions are:

• Your business turnover is less than $2 million, or has net assets of $6 million or less
• The assets involved are "active assets"
• Special rules apply where the asset sold is a share in a company or interest in a trust.

Whilst these conditions may seem simple, there are complex rules hiding behind them that you must consider when determining if your situation satisfies these conditions. Case law and ATO rulings also add to the complexity.

Franchised businesses comprise a large portion of the SME market in Australia. It is not unusual for a franchised business to have a turnover of less than $2 million or to be owned by families with net assets of less than $6 million. If you own a franchise and are thinking of selling, it is vital to seek advice about your qualification for the small business CGT concessions.

Whether the CGT small business concessions apply to the sale of your business or business assets or not can have a major impact on the amount of capital gains tax you ultimately pay.

With the ATO's focus on the CGT concessions claimed by taxpayers and the application of penalties (up to 50%) to any shortfalls in tax, it is extremely important that you thoroughly research and document your entitlement to these concessions before lodging your income tax return. It could save you from paying significant amounts of capital gains tax when you sell your business.

If you would like help with the application of the small business CGT concessions to your situation, please contact me or your WHK Horwath adviser.

Chris Paterson
Principal - Business Advisory Services

P. 08 9481 1448

E. chris.paterson@whkhorwath.com.au

This information contained in this newsletter was compiled by WHK Pty Ltd ABN 84 006 466 351 (WHK) and WHK Financial Planning Pty Ltd ABN 51 060 092 631 (WHKFP).  This is an information service only and is not financial advice.  WHK and WHKFP do not provide any warranty regarding the accuracy and completeness of information in this newsletter.  All material contained in this newsletter is based on opinions, conclusions and forecasts that are reasonably held at the time this newsletter was compiled.  WHK and WHKFP assume no obligation to update the material to reflect any changes.  WHK, WHKFP, their Directors, employees and agents disclaim all liability for any error, inaccuracy or omission from the information contained in this newsletter or any loss or damage suffered by the recipient or any other person directly or indirectly by relying on the information to the extent permitted by law.

No action should be taken solely on the material contained in this newsletter as the information is of a general nature and does not take into account personal circumstances.  Before acting on any material contained in this newsletter you should seek professional advice.

WHKFP is the holder of Australian Financial Services Licence number 238244.  WHKFP and WHK are both WHK Group firms.