CGT won’t apply when you sell your home. However, if you used any portion of your home for your business, you may need to pay CGT. If any of the written below occurred with your home-based business, CGT won’t apply:
- You ran your business from a rented home.
- You didn’t have a space reserved for business activities.
- You ran your business via a company or trust.
You only need to pay CGT for the time period you used your home for your business activities. For instance, if you owned your home for ten years but only for the last 2 years, you used it for business purposes, then you only have to pay tax on the capital gain in the last 2 years. In most cases, the percentage of the capital gain and the percentage for which you can claim a deduction for mortgage interest is the same. It depends on the floor area of your home reserved for business, for instance, 10%.
You may be allowed to apply for one or more of the small business CGT concessions to minimise your capital gain unless the primary use of the house was to generate rent.
How do CGT Concessions Work for Small Businesses?
The CGT concessions for small businesses enable you to minimise some or all of the capital gain from an active asset utilised in a small business. The four small business CGT concessions include the:
- small business 15-year exemption
- small business 50% active asset reduction
- small business retirement exemption
- small business roll-over
When you dispose of an active asset and meet the required eligibility criteria, the concessions are then available. You need to meet any additional conditions that apply to the individual concessions. There are rules and regulations in the order you apply:
- the CGT small business concessions
- any current year or previous year capital losses
- the CGT discount.
You can apply one or both of the written below to each capital gain:
- over one of the 4 concessions if you meet the eligibility for each
- the CGT discount in case it also applies.
Basic Eligibility Conditions
You must first satisfy the fundamental eligibility requirements in order to be eligible for any of the CGT concessions.
Depreciating assets do not meet the prerequisites for eligibility:
- Any gain or loss from a depreciating asset is included in your assessable income under the uniform capital allowance system or is deducted as a balancing adjustment, to the extent that the asset was utilised for a taxable purpose (business use). Gains you make on depreciating assets that are included in your income are not covered by the small business CGT concessions.
- If you utilise a depreciating asset for a non-taxable (private) purpose, you may realise a capital gain or loss from it. Because it represents the asset’s non-business usage, any capital gain you make in this way is not eligible for the small business CGT reductions.
Applying the Small Business CGT Concessions
If you have several capital gains for the year, you may apply as many CGT concessions for small businesses as you are eligible for, up to the point at which each capital gain is zero. The attributable capital gain for each active asset is evaluated separately for CGT concession eligibility. If the fundamental requirements are satisfied and you have not specifically opted for it not to apply, the small business 50% active asset reduction will automatically apply.
However, you must decide whether to use the small business retirement exemption, small company rollover, and small business 15-year exemption. If the ATO doesn’t let you make the decision later, you must make it by the day you file your income tax return for the income year in which the relevant CGT event occurred.
In most cases, lodging and filing your income tax return is sufficient evidence of your decision. However, you must maintain a written record of the sum you decide to ignore for the small business retirement exception. Make sure you know how to apply for small business CGT concessions, if you don’t know how to do it, then you can seek help from small business accountants.
If you are running a home-based business, you must be aware of possible CGT implications. For in-depth details, you can also speak to Reliable Melbourne Accountants.
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