If you are an owner or a shareholder in a small business about to be sold, you might be surprised to discover you may qualify for a R1.8 million exclusion on capital gains tax, although there are several criteria and considerations in order for your business to qualify for the exclusion.
Qualifying criteria
The exclusion only applies to active business assets that have been used exclusively for trade purposes. If you are a member of a closed corporation or a shareholder in the business you must hold 10% of the asset and the asset must have been held for at least five years “prior to disposal”. This is an important point to note as many people sell before the five years or change the format of the business.
In order to qualify, the sale must be a wholesale sale as the full capital gain must be recognised within 24 months of its first disposal. SARS stipulates that all shares held must be disposed of during a year of assessment. If you hold 10% of the shares and only sell 5% in the first year of assessment and the remaining 5% in the second year of assessment, the transaction will not qualify for an exclusion on capital gains tax.
In addition, the entire market value (and not just your share) of the business must be less than R10 million. While this exclusion can be applied for multiple businesses that you own or have a share in, the R1.8 million exclusion is over a lifetime and not per business.
Assets: what is included and excluded
The tax concession also only applies to immovable property used for business purposes and does not apply to any part of the immovable property used for non-business purposes. For example, if you are working and living in the same building, the exclusion will relate to the area of the building where you work and not the rest of the building.
All assets producing rental income – whether immovable (like property) or movable (like boats or cars) are excluded from exemption as are all financial instruments related to the business like loans, advances, futures, options, bank deposits, debt etc.
Make sure you maximise your tax relief
To ensure you are not missing out on tax relief that you and your business may be eligible for, speak to our experienced tax team today