Trusts
15. Capital Gains Tax (CGT)
Authors: Staff Legal Eagle
Firm / Chambers:
Last updated: 23 Sep 2015
- Capital Gains Tax (CGT) considerations are very important when choosing the appropriate entity for you to own and run your business.
- The CGT regime taxes the money which is made when an asset has increased in value over time and is then sold. It is not considered to be a separate tax but is part of your income tax.
- A capital gain will often be obtained by selling:
- real estate;
- shares;
- goodwill;
- contractual rights; or
- managed fund investments.
- Even though you may be consulting a lawyer at the time of starting up a business and do not intend to sell the business or its assets for many years thinking about your CGT liability now could result in substantial savings later. CGT advantages are one of the main benefits of using a trust rather than a company structure.
- Generally discretionary trusts are an appropriate way to hold appreciating assets like land or shares.
- If the trust deed allows it capital gains can be distributed to beneficiaries (discretionary trusts) or split among them in proportion to their entitlement to trust income (unit trusts). This means the tax on the gain is shared among beneficiaries to minimise the overall burden. These capital gains are also taxed at concessional rates.
- There are also a number of concessions available for capital gains made from trust property.
- A particular benefit of a discretionary trust is that any beneficiary who receives a capital gain distribution can claim the 50% capital gains discount as long as the relevant asset has been held for more than 12 months. This is a particular advantage over a company structure. If a company attempted to sell the family business (the asset) it would not be entitled to the 50% CGT discount.
- In addition to this discount there are a number of small business CGT concessions. It can be difficult for companies (and sometimes unit trusts) to obtain these concessions. A number of conditions must exist before the concessions will apply to company assets and these are often more difficult for companies to establish than discretionary family trusts.
- For example if your small business has less than $2 million in sales turnover or less than $6 million net assets you might be able to access all of the CGT concessions.
- For trusts there is an additional hurdle called the 'significant individual' test. An individual can access the concessions if they receive at least 20% of the income or capital distributed in the year the capital gain is made.
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