If you sell your small business because you need to retire and you make a profit on it, you have to pay Capital Gains Tax (CGT). Or at least, that's the rule for big businesses.
If you own a small business, CGT works slightly different. And it's important to know how it affects you. If you don't you could end up paying SARS way more than you should.
In fact, if you're a small business owner and you don't know how CGT affects you, you could be paying SARS way more than you should.
This is a cost you might not be able to afford when you sell your business.
That's why today, I'm explaining exactly how Capital Gains Tax affects you when you sell your small business...
Here's how Capital Gains Tax affects small businesses
If you own a small business and your annual turnover doesn't go over R5 million, you get a special CGT
allowance when you sell your business to retire.
This provides relief to small business owners who are retiring. And it doesn't matter if you own the business directly or as a close corporation or partnership either. You can use this allowance if you:
• Are a sole proprietor;
• Are part of a partnership and you withdraw from that partnership; or
• Have a direct interest in a company, with at least 10% of the equity.
But before you do, treasury.gov.za explains you must be over 55 and retiring, or selling your business so you can retire because of ill-health. You must also have owned your business and all its assets for more than 5 years.
If you qualify for this allowance, CGT
will work like this: You can deduct the first R1.8 million of the profits from selling your business and what's left is the amount you'll be CGT
Check out this article
to fine out how to calculate your CGT
on this amount.
You must also realise all capital gains within 24 months after selling your business to use this allowance.
But what happens if you operate more than one small business and you sell all of them when you retire?
*********** Reader's choice ***************
Eight ways to LEGALLY beat the taxman
There are a few CGT
loopholes that can save you thousands of rands every single year and, in some cases, let you off the CGT
Here's what to do with your Capital Gains Tax if you run more than one small business
Total up all the capital gains you make from selling all your small businesses. Then work out the total Capital Gains Tax you'd pay on the total gain. Finally, deduct your allowance from that to work out your CGT
on all your businesses.
Note: If the total market value of all assets for all your businesses exceeds R10 million, you can't use the allowance.
And don't try to claim more than this allowance of R1.8 million. SARS keeps records of exemptions it allowed you. It will judge your transgressions harshly and you could face 200% penalties on what you try to claim extra!
There you have it! You don't have to pay as much Capital Gains Tax to SARS when you sell your small business on retirement.
Just stick to these rules so SARS doesn't charge you penalties for making a mistake.