15-Year Small Business CGT Exemption: A Comprehensive Guide
Overview
The 15-year small business capital gains tax (CGT) exemption provides significant tax benefits to eligible individuals and entities. This exemption allows for the complete exemption of capital gains on the sale of business assets, resulting in a 100% tax-free outcome.
Eligibility Requirements for Individuals
To qualify for the 15-year exemption as an individual, the following requirements must be met:
Key Facts
- The individual must have continuously owned the CGT asset for a 15-year period just before the sale.
- At the time of the CGT event, the individual must be at least 55 years of age, and the event must happen in connection with their retirement.
Requirements for Companies or Trusts:
- The entity must have a significant individual for a total of at least 15 years during which the entity owned the asset.
- The individual who was the significant individual just before the CGT event must retire or be permanently incapacitated.
- An individual is considered a significant individual if they own at least 20% of the entity or have an ownership interest in the entity and are a spouse of a significant individual.
Additional Information:
- The 15-year exemption allows any capital gains on the sale of business assets to be entirely exempt from tax, making it 100% tax-free.
- There is no need to offset the gain with any current or prior capital losses before applying the 15-year exemption. Capital losses can be carried forward and offset against other capital gains that are not eligible for the 15-year exemption.
- To be eligible for the small business CGT exemptions, either the small business entity or the maximum net asset value test must be passed. A small business entity is an entity that is carrying on a business and has less than $2 million aggregated turnover. The maximum net asset value test requires that the total net value of CGT assets owned by certain entities does not exceed $6 million just before the CGT event that results in the capital gain occurs.
- Continuous ownership of the CGT asset for a 15-year period immediately preceding the sale
- Age of at least 55 years at the time of the CGT event
- Occurrence of the CGT event in connection with the individual’s retirement
Eligibility Requirements for Companies or Trusts
For companies or trusts to access the 15-year exemption, the following conditions apply:
- Presence of a “significant individual” for a minimum of 15 years during which the entity owned the asset
- Retirement or permanent incapacitation of the significant individual just before the CGT event
- Definition of a significant individual as someone who owns at least 20% of the entity or has an ownership interest and is a spouse of a significant individual
Additional Considerations
- The 15-year exemption eliminates the need to offset gains with current or prior capital losses, allowing for the preservation of capital losses for future use.
- To qualify for the small business CGT exemption, the entity must meet either the small business entity or maximum net asset value test. A small business entity has an aggregated turnover of less than $2 million, while the maximum net asset value test requires that the total net value of CGT assets owned by certain entities does not exceed $6 million before the CGT event.
Conclusion
The 15-year small business CGT exemption provides a valuable tax-saving opportunity for eligible individuals and entities. By understanding the eligibility requirements and additional considerations, taxpayers can effectively utilize this exemption to maximize their financial benefits.
Sources
- https://www.stptax.com/tax-tips/15-year-small-business-cgt-exemption/
- https://www.nyc.gov/site/hpd/services-and-information/tax-incentives-421-a.page
- https://webapps.dol.gov/elaws/whd/flsa/cl/exemptions.asp
FAQs
What is the 15-year small business CGT exemption?
The 15-year small business CGT exemption is a tax break that allows eligible individuals and entities to completely exempt capital gains on the sale of business assets from taxation.
Who is eligible for the 15-year small business CGT exemption?
Individuals who have continuously owned the CGT asset for 15 years and are at least 55 years old at the time of the sale, and the sale occurs in connection with their retirement, are eligible. Companies or trusts with a significant individual who has owned at least 20% of the entity for 15 years and who retires or becomes permanently incapacitated before the sale may also be eligible.
What are the benefits of the 15-year small business CGT exemption?
The 15-year small business CGT exemption provides significant tax savings by eliminating the tax liability on capital gains from the sale of business assets.
How do I claim the 15-year small business CGT exemption?
To claim the 15-year small business CGT exemption, eligible individuals and entities must meet the eligibility requirements and provide documentation to support their claim when filing their tax returns.
What is the difference between the small business entity test and the maximum net asset value test?
The small business entity test requires that the entity have an aggregated turnover of less than $2 million. The maximum net asset value test requires that the total net value of CGT assets owned by certain entities does not exceed $6 million before the CGT event.
Can I offset capital losses against gains that qualify for the 15-year small business CGT exemption?
No, the 15-year small business CGT exemption eliminates the need to offset gains with current or prior capital losses.
What is a significant individual?
A significant individual is someone who owns at least 20% of an entity or has an ownership interest and is a spouse of a significant individual.