Accessing the CGT small business concessions for rental properties

When dealing with the disposal of an asset, such as a rental property, Capital Gains Tax (CGT) small business concessions can significantly reduce, and sometimes even eliminate, the associated tax liabilities. However, the criteria to access these concessions are stringent and must be met carefully. That’s why it’s important to have advice from experienced tax accountants to help ensure your tax planning is accurate.

Understanding the criteria

To qualify, the taxpayer must first pass the $6 million Maximum Net Asset Value test, or have a business turnover of less than $2 million—considering associates as well. Additionally, the asset must satisfy the “active asset test.” This means it should have been actively used in the taxpayer’s business, or in a connected entity’s business for a specific duration.

Rental properties and business activities

It may seem unlikely that rental properties would meet the compliance standards for CGT small business concessions due to the passive nature of the income. However, a common strategy involves separating the trading business and the ownership of the property from which the business operates. For instance, if a Trading Trust conducts the business and a Land Trust owns the property, and they are connected entities, then the property may be eligible for the concessions.

Complexities in connection

The intricacies involved in proving the connection between entities such as the Land Trust and Trading Trust require careful navigation. If these entities are connected and meet the Maximum Net Asset Value test, they could benefit from the CGT small business concessions, reducing the potential capital gain.

Additional discounts and reductions

Trusts holding an asset for over 12 months usually already qualify for a 50% discount on capital gains tax. When combined with the active asset discount from the CGT small business concessions, the reduction could be substantial. For example, an asset bought for $500,000 and sold for $1,000,000 could see the capital gain reduced first to $250,000 with the general capital gains tax discount, and then to $125,000 with the active asset discount.

Expert taxation advice from LDB

If you are a small business owner contemplating the sale of a business or associated property, it’s crucial to seek expert advice about tax strategies and compliance. LDB’s Taxation Specialists can guide you on CGT small business concessions and other tax considerations, such as Goods and Services Tax implications. For tailored tax planning and compliance advice, contact our tax agents at LDB on (03) 9875 2900