SMALL BUSINESS CGT CONCESSIONS TO BE HIT WITH A RETROSPECTIVE TIGHTENING
Changes to the small business CGT concessions where the CGT asset is shares in a company or an interest in a trust:
Currently before the House of Representatives, the Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 contains several important changes to the small business CGT concessions. Although branded as ‘integrity measures’, the Bill actually implements a raft of new conditions that taxpayers and advisors should be aware of. Significantly, these proposed changes are retrospective and are set to apply to the sales of shares and trust interests occurring after 1 July 2017.
The proposed new section 152-10(2) of the Income Tax Assessment Act 1997 limits a taxpayer’s ability to access the concessions where the transaction involves a sale of shares or an interest in a trust by imposing the following additional basic conditions:
- Unless the taxpayer satisfies the maximum net asset value test, the taxpayer must have carried on a business just prior to the CGT event.
- The object entity must be a CGT small business entity for the income year or satisfy the maximum net asset value test.
- The shares or interests in the object entity must satisfy a modified active asset test that also takes into account the assets of companies and trusts in which the object entity has an interest.
The most significant of the changes is the new requirement for the object entity to be a small business entity or satisfy a modified $6m net asset test. Consider the following example:
- Adam carries on a small business as a sole trader. He is a CGT small business entity (according to the general rules) for the 2019/20 income year.
- Adam also owns 25% of the shares in Large Pty Ltd, a company which has annual turnover of over $10 million and $12 million in net assets (which are all active assets).
- Adam sells his shares in Large Pty Ltd for $3 million.
Under the current rules, Adam can access the small business CGT concessions on the sale of the shares in Large Pty Ltd. He satisfies the basic conditions as he is a CGT small business entity, the shares are active assets and he is a CGT concession stakeholder in Large Pty Ltd (>20%).
However, under the proposed new rules Adam cannot access the small business CGT concessions as the object entity, Large Pty Ltd, is not a small business entity for the 2019/20 income year and does not satisfy the maximum net asset value test.
The proposed changes signify the first major legislative pullback in the availability of the small business CGT concessions. Taxpayers and advisers with clients who are considering a sale or divestment of shares or trust interests – or who have undertaken a sale or divestment post 1 July 2017 – should consider whether these new provisions might affect their access to these generous concessions.
If you or a client needs advice or assistance, please contact JL Lawyers on 08 8227 1583 or email Sia@jllaw.com.au.