Changes to small business CGT concessions
As part of the recent Federal Budget, the Government announced proposed changes to the Small Business Capital Gains Tax (“CGT”) concessions. These changes were introduced to address perceived weaknesses in the legislation which allowed certain taxpayers who were beyond the scope of the legislation to access to these concessions. However, with the current turmoil among Government ranks, this law is yet to passed by the Senate and accordingly, uncertainty continues.
The concessions remain available to taxpayers that meet certain thresholds in relation to CGT events. These include the $2 million turnover test and the $6 million net asset value test.
What were the perceived weaknesses?
Under the current law, certain taxpayers are able to access the concessions that were not originally intended to be able to access the concessions.
As an example, a taxpayer with a 20% interest in a company that is worth $100 million (i.e. with a prima facie value of $20 million) can currently access the concessions on selling the shares in that company if they also carry on a small business (turnover of less than $2 million) in their own capacity.
What are the proposed changes?
The Bill introduces several technical changes to the operation of the concessions, which are proposed to be in place for CGT events occurring after 1 July 2017. This poses a number of challenges given we are now in September 2018 without legislative effect to the proposed changes.
Firstly, the Bill closes the loophole outlined above by adding another layer on testing eligibility, requiring that the entity in which shares or units are sold is itself a small business entity, or passes the maximum net asset value test. This however restricts the concession further than perhaps is reasonable. As an example, a 20% shareholder in a company that is worth $10 million (i.e. shares worth $2 million) with turnover of $3 million would currently be eligible to the concession, however going forward it will not, as the company itself has turnover of greater than $2 million and assets of more than $6 million.
The other major change proposed relates to the linking of related entities for the purposes of testing the turnover and asset thresholds. Previously, if a shareholder had a 40% interest or more in a company, the entire value of the company needed to be included in testing the $6 million asset value test. This threshold will now be lowered to 20%, which means far fewer taxpayers will be able to pass the $6 million test.
The Small Business CGT concessions remain valuable to small business, even if accessing them will become more difficult in the future. If you have any questions about accessing these concessions or capital gains tax generally, please contact your ESV engagement partner on 02 9283 1666.