Small Business CGT Concessions
The small business CGT concessions are extremely valuable. And for small business owners who need to dispose of assets that have risen in value during the time they have owned them, accessing these concessions can mean greatly reducing any consequent tax liability. However, they can also be confusing and complicated. So knowing the rules can go a long way to ensuring you are taking the best advantage of the relief.
As part of its 2017-18 Budget on 9 May 2017, the Government announced proposed amendments to the tax law which would limit the application of the small business CGT concessions. The new “integrity rules” into the small business CGT concessions will take effect on 1 July 2017.
The proposed legislation includes 4 new criteria to be satisfied. The draft legislation repeals s 152-10(2) of the Income Tax Assessment Act 1997 (the ITAA 1997). In substitution, it inserts a new s 152-10(2). The conditions of the new subsection are:
- a stricter active asset test
- if a taxpayer relies on the CGT small business entity test to qualify for the SB concessions, they must be carrying on a business just before the relevant CGT event
- the company or trust in which the shares or units are being sold (the object entity) must be carrying on a business just before the CGT event, and
- the object entity must itself either satisfy the CGT small business entity test or a modified $6m maximum net asset value test.
We will explain each of the new requirements in more detail below.
Active Asset Test
The draft legislation requires that an additional active asset test must be satisfied (new s 152-10(2)(a)), based on the following assumptions:
- All, financial instruments are excluded unless those instruments are held as trading stock, or as part of certain financial services businesses
- cash is excluded unless that cash is held by the company or trust as trading stock
- shares and units held by the object entity are excluded. Instead, a look-through approach will be taken with the underlying assets of the later company or trust.
SBE Must Be Carrying on a Business
A taxpayer will be a CGT small business entity if they carry on a business at any point of time in a particular income year. The draft legislation requires that if a taxpayer qualifies for the SB concessions only because they are a CGT small business entity, they must also be carrying on a business just before the relevant CGT event.
Object Entity Must Be Carrying on a Business
The draft legislation introduces a completely new requirement that the object entity must be carrying on a business just before the CGT event. Previously, it was sufficient that the active asset test was met.
This particular requirement is also beyond the scope of the Budget announcement. Moreover, it will effectively disqualify taxpayers from claiming the SB concessions in the following situations:
- The object entity has ceased to carry on a business. But still owns business assets (eg land) which it is now seeking to sell
- A business is structured with the business owned and operated by one entity and the property from which that business is conducted is owned by another entity (this type of structure is common for asset protection reasons). In that scenario, the sale of the shares or units in the property owning entity could never be eligible for the SB concessions.
Object entity; CGT small business entity; modified $6m asset test
In this requirement the object entity must either qualify as a CGT small business entity. OR, satisfy a modified $6m net asset value test (MNAV test). Previously, only the taxpayer making the capital gain needed to meet this requirement.
The modified MNAV test aggregates the assets of the object entity’s affiliates. Also, any entities in which the object entity has a greater than 20% controlling interest. Thus, it does not aggregate other commonly-controlled entities like the standard MNAV test does. However, the threshold for inclusion in the MNAV test is much lower. With 20% controlling interests being included in the calculation versus the usual 40% threshold under the normal MNAV test.
In summary, the Draft Legislation will provide a significant integrity improvement to the SBCGT Concessions. Specifically, the requirement for an Object Entity to be a CGT small business entity or satisfy the MNAVT. It would make it more difficult for taxpayers to arrange their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the SBCGT Concessions.
Unfortunately, the proposed bill has retrospective application which is stated to apply from 1 July 2017. This could have a great impact to some tax payers who are relying on the current law. However, it may not be eligible once the bill is passed.
If you think you will be affected with the above changes and you need advice on what to do, please contact 02 4732 3844 or visit www.judgeaccountants.com.au.