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Editor

Founder at The Passive Investor

The Editor is also the Founder of The Passive Investor website. He is a part-time practising General Practitioner (GP) with an interest in all financial and investment-related topics. He is particularly focused on the integrated use of residential property, commercial property and the sharemarket to develop effective financial strategies for wealth accumulation and distribution.

Latest posts by Editor (see all)

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Investing in a tax-effective way is an essential part of our investment approach, and as such it is worth considering the role of “tax-free” assets as part of your overall investment strategy.

Basically there are three tax-free assets you can use, and this does not include tax-free investment structures such as super funds when in pension mode.

These are:

1. Your Principal place of residence (PPOR)

2. Your own business

3. Your own business premises

Your PPOR is a capital gains tax (CGT)-free asset.

And further, if you move into your PPOR then later move out of it and rent it to a tenant, it can remain a CGT-free asset for up to 6 years after you have moved out from it.

This 6 year period re-starts if you move back into the property within 6 years and then move out again.

The Australian Government also has a number of CGT concessions designed specifically to encourage and support small businesses.

The small business CGT concessions provide the following:

1. The 15-year exemption: this can eliminate a capital gain altogether when the underlying asset being sold has been held for more than 15 years.

2. The 50% active asset reduction: this can reduce the overall capital gain by 50% on assets held for more than 12 months, and can be applied in addition to the general 50% CGT discount concession.

3. The retirement concession: this allows a taxpayer to reduce capital gains by up to $500,000, even when the taxpayer is not physically retiring, if the amount is paid into a complying superannuation fund or a retirement savings account.

4. The rollover concession: this allows a taxpayer to rollover a capital gain into the cost base of a replacement asset acquired within a two-year period.

There are certain conditions that must be satisfied before these concessions are available, including:

1. The net asset value of the taxpayer and its associates must be less than $6 million. Alternatively, the turnover of the taxpayer and its associates must be less than $2 million.

2. The asset being sold must have actively been used in the operations of a business.

3. If the asset being sold is a share in a company or a unit in a unit trust, the taxpayer must own at least 20% of the company or trust, in which case the taxpayer is referred to as a CGT concession stakeholder.

The small business CGT concessions are detailed in the ATO website:

CGT concessions for small business – overview

These concessions also apply to business premises owned and used in the business.

So after utilising all of the above concessions the sale of a business and its premises can effectively be CGT-free, just like your PPOR.

Hence owning a PPOR, your own business and business premises makes a lot of financial sense.

And any investment strategy should always consider being “tilted” towards having these three assets as a solid foundation for generating future wealth.