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Most people are a bit hazy on the difference between a tax offset and a tax deduction. The key difference is the point at which they are applied to your income when calculating the final amount of tax payable.
Talking to your employer about setting up an arrangement to “sacrifice” some of your pre-tax salary could potentially lower your tax bill – and boost your retirement nest egg.
A balancing act Billed as a Budget for families with a focus on relieving short-term cost of living pressures, Treasurer Josh Frydenberg’s fourth Budget also has one eye firmly on the federal election in May.
Jacqui Sherlock, CEO of Sherlock Wealth was recently featured in an interview with Essential Solutions. Jacqui highlights her leadership journey and the important role that the whole team plays in creating a positive future for their clients.
Some of the last sitting days before this year’s Federal election saw changes to the tax and super rules finally pass through both houses of Parliament. Here’s a roundup of some of the key developments.
Treasurer Josh Frydenberg says rising confidence and a further unexpected drop in the unemployment rate are another sign there will be a strong economic recovery when virus lockdowns come to an end.
The Government is continuing to tighten the eligibility rules for claiming tax concessions relating to small business capital gains tax (CGT) obligations.
If you qualify, these concessions can have a big impact on how much of the profit from the sale of a business asset you get to keep, and how much goes to the taxman.
Given the generous nature of the concessions, the ATO is keen to ensure they are used appropriately.
Ruling tightens eligibility
Selling an income-producing asset such as property, business equipment or shares at a profit, will create an assessable capital gain. This capital gain is then used to calculate your CGT obligation, which forms part of your annual income tax bill.
Business owners are permitted to use several tax concessions to reduce their CGT obligation, but the eligibility rules can be tricky to navigate.
A new tax determination (TD 2021/2) has further tightened them by clarifying that companies carrying on a business whose only activity is renting out an investment property are not eligible to claim the CGT concessions when the property is sold.
Although this ruling is a big loss for some property investors, it’s worth remembering that if you do qualify, these concessions can substantially reduce – or even eliminate – the CGT payable on the sale of business assets.
Small business and CGT
The four small business CGT concessions are in addition to the normal 50 per cent general discount on CGT applying when you have owned an asset for more than 12 months.
Generally, the concessions apply to any asset your business owns and eventually sells at a profit, provided your annual turnover is under $2 million.
The four small business CGT concessions are:
- The 15-year exemption exempts the capital gain generated on a business asset you have owned for at least 15 years. The sale proceeds can then be contributed into your superannuation account (up to the relevant contributions limit). If you don’t qualify, you can still use the normal 50 per cent CGT general discount first, then use any of the remaining small business concessions for which you qualify.
- The 50 per cent active asset reduction allows you to reduce any capital gain from the sale of an active business asset.
- The retirement exemption applies if you sell an active business asset to retire. In this situation, you receive a CGT exemption up to a lifetime limit of $500,000. One catch, however, is if you are aged under 55. If so, your profit must be paid into a complying superannuation fund. This exemption cannot be used for capital gains from passive investment assets.
- The rollover concession can be used to defer your capital gain from the disposal of an active business asset to a later financial year. You must buy a replacement business asset or make a capital improvement to an existing asset to qualify.
If your business turnover is over $2 million but under $10 million, you may be able to use the small business restructure rollover concession. This permits the transfer of active assets – including CGT assets, trading stock and depreciating assets – from one business entity to another without incurring an income tax liability.
Qualifying for CGT concessions
You can apply for as many of the four special CGT concessions as you are entitled to. In some situations, this can reduce your capital gain to zero. Before applying, you need to meet the basic eligibility conditions for the CGT concessions.
As the release of TD 2021/2 shows, the government regularly tightens the eligibility criteria for these concessions, so if you plan to take advantage of them, ensure you check the qualifying requirements carefully – or speak to us – as the process is quite complex.
Put simply, you must satisfy four basic conditions applying to all the concessions and then check if you meet the additional eligibility rules applying to each CGT concession.
The first condition requires you to be either a small business entity (SBE) with an aggregated turnover of less than $2 million; not carrying on a business but have a ‘passively-held asset’ used in the business as a connected entity; a partner in an SBE partnership; or satisfy the maximum net asset value ($6 million) test.
In addition, the business asset you are disposing of must satisfy the active asset test. If the asset is a share in a company or an interest in a trust, it must meet additional conditions.
The final step covers assets related to membership interests in a partnership. Each step must be considered in the set order before moving to the eligibility criteria for the individual concessions.
If you would like more information about the tax implications surrounding the disposal of your business assets, call us today.
Case study
The tough trading conditions resulting from COVID-19 mean Nasir has decided to downsize his trucking business. He sells an active asset, which is a haulage vehicle he has owned for four years. As a result, he makes a capital gain of $80,000.
At the same time, he makes a separate capital loss of $10,000 when he sells another smaller piece of equipment.
As Nasir satisfies all the eligibility conditions for the normal CGT discount and the small business 50% active asset reduction concession, his capital gain position for these assets is:
| Capital gain | $80,000 |
| Capital loss | $10,000 |
| Take the capital loss away from the capital gain | $70,000 |
| Apply 50% CGT discount ($70,000 x 50%) to the remaining capital gain | $35,000 |
| Apply 50% small business active asset reduction ($35,000 x 50%) to the remaining capital gain | $17,500 |
| Reduced capital gain | $17,500 |
Nasir may be able to further reduce his $17,500 (reduced) capital gain if he satisfies the conditions applying to both the small business retirement exemption and the rollover concession.
As a small business owner do you know what your CGT obligations are? Reach out to the Sherlock Wealth team here to help you get started.
* This case study is for illustrative purposes only. Please seek advice for your specific circumstances.
Investing in recovery In his third and possibly last Budget before the next federal election,…
It has been a year like no other. When it comes time to doing your annual business review, however formal or informal that may be, think about the well-being of your team. How has your team come through the year?
Leaders play a crucial role in creating thriving workplaces, no matter the size of the team. And more and more information is coming to hand that investing in workplace mental health makes sound business sense.
Productivity Commission on Mental Health
A couple of weeks ago, the Productivity Commission released its long-awaited report on mental health. Unlike other many reports on the topic, this one used an economic lens to investigate mental health impacts. In doing so the Commission estimates the total combined cost to the Australian economy of mental ill-health is around $220b each year.1
The report identified the importance of building mentally healthy workplaces and enabling people to participate in and thrive at work. The Commission made a number of recommendations relating to embedding psychological health and safety in workplaces, assisting employers to meet their duty of care, ensuring minimum standards for employee assistance programs and creating better workers compensation schemes.
The role of workplaces
So how much, or little, does your workplace do in relation to the mental well-being of team members?
According to one study by Beyond Blue, 91% of employees believe workplace mental health is important but only 52% believe their own workplace is mentally healthy.2
Creating a thriving workplace is not just good for your people – data shows that every $1 spent can provide a $2.30 return by way of factors like increased productivity and reduced absenteeism.3 This means that efforts to improve employee well-being may boost your bottom line too.
Here are a few points to consider.
Workplace Health and Safety
You may be aware of legislative requirements for the physical health and safety of employees, but the obligations extend to psychological safety too.
If your workplace has never conducted a psychosocial risk assessment, it may be something to consider. Safe Work Australia has a lot of information to help get you started.
Psychosocial work hazards increase the risk of stress and can impact an employee’s mental health. These factors include:
• Excessive job demands
• Low job control
• Workplace conflict or bullying
• Low role clarity
• Poor organisational change management and uncertainty
• Low recognition and reward
• Unfair work practices
• Lack of support
• Isolation
• Exposure to trauma
Checking in with your team
Sometimes a person may appear okay on the surface, but below the surface, it may be a different story. Everyone has a role to play in recognising potential warning signs. This can be as simple as asking someone how they are going. It can be awkward or uncomfortable to have these chats but there is a lot of information to guide you.
In fact, there is no shortage of workplace mental health training and resources available. Helpful resources include the workplace mental health hub, Heads Up, developed by Beyond Blue which includes a comprehensive ‘how-to guide’, and national mental health promotion foundation, Superfriend, who recently released their Indicators of a Thriving Workplace report.
No matter what state or region you live in, there is a stack of information at your disposal.
Burnout
One of the most observable trends to come out of COVID-19 is the tendency for people to overwork. The blurred lines between our work and personal lives is a big contributing factor. Alongside physical symptoms, burnout can have many other negative repercussions including reduced cognitive ability, increased stress, reduced productivity and it could even have a negative effect on team culture.
It’s worth noting that leaders have been under increased pressure as a result of COVID-19 with increased expectations and responsibilities falling on them. This also highlights the need for leaders to look after themselves and model good self-care in their own lives. To use an old analogy, leaders need to put their own oxygen mask on first before helping others!
1 https://www.pc.gov.au/inquiries/completed/mental-health#report
2 https://www.headsup.org.au/docs/default-source/resources/bl1270-report—tns-the-state-of-mental-health-in-australian-workplaces-hr.pdf?sfvrsn=8
3 Creating a Mentally Healthy Workplace, PwC and Beyond Blue 2014. https://www.headsup.org.au/docs/default-source/resources/beyondblue_workplaceroi_finalreport_may-2014.pdf
This information is current as at November 2020. This article is intended to provide general information only and has been prepared without taking into account any particular person’s objectives, financial situation or needs (‘circumstances’). Before acting on such information, you should consider its appropriateness, taking into account your circumstances and obtain your own independent financial, legal or tax advice. You should read the relevant Product Disclosure Statement (PDS) before making any decision about a product. While all care has been taken to ensure the information is accurate and reliable, to the maximum extent the law permits, ClearView and its related bodies corporate, or each of their directors, officers, employees, contractors or agents, will not assume liability to any person for any error or omission in this material however caused, nor be responsible for any loss or damage suffered, sustained or incurred by any person who either does, or omits to do, anything in reliance on the information contained herein.
