The Government has released an exposure draft focusing on improvements to the small business capital gains tax concessions. The proposed changes were initially announced in the 2017/18 Federal Budget to apply from 1 July 2017, however, as is so common now, the proposed rules have only just been released.
The proposed changes to the law impact many fundamental positions surrounding the availability of the concessions. Importantly the control test used, when the CGT event includes a share or unit, is proposed to be lowered from the existing 40% to a 20% level. This will result in more entities being “connected with” one another and thus fewer entities being eligible for the concessions.
In addition to the above the following changes have been proposed:
- That the vendor carries on a business, where the $6 million ‘maximum net asset value’ test is not satisfied;
- The company or trust carrying on a business just before the CGT event;
- The trust or company being a ‘small business entity’ for the relevant income year or satisfying the $6 million ‘maximum net asset value’ test; and
- The ‘active asset’ test changes to restrict the situations where financial instruments and cash can be included in the active asset test.
The above changes are likely to have far reaching consequences for the small business community. The original announcement was based on an integrity issue, however the changes proposed would if enacted have a significant impact on the Coalition’s support base by severely restricting the concessions. Furthermore, the delay in the draft legislation means its proposed application from 1 July 2017 essentially results in another piece of adverse legislation with retrospective application.
Given the uncertainty around these rules, where transactions have already occurred you may need to reconsider eligibility, or where they are proposed to occur, you should factor in the potential changes when ascertaining your after-tax position.
We will provide additional updates in relation to the proposed changes when possible, however, if you have any questions in relation to small business capital gains tax concessions please contact your ESV Engagement Partner on 02 9283 1666.