Major changes to small business CGT concessions
Will you or your client ever sell shares in a company or units in a unit trust? Were you planning to access CGT concessions to reduce the tax on the gain? If so, think again, as you may no longer be eligible for any tax concessions on the sale.
In what has been described by the Government as an ‘integrity measure’, a bill currently before Parliament proposes to make major changes to how the small business CGT concessions apply on the sale of shares in a company or units in a unit trust. Significantly, the changes will apply to all sales of shares or units where the vendor is looking to access the concessions, not just those contrived arrangements seen to be inappropriately accessing the concessions.
The small business CGT concessions
The small business CGT concessions were originally introduced nearly 20 years ago to allow owners of eligible assets to either fully, or partially, reduce the tax payable on the sale of that asset. The amount of the reduction available depends on which of the four concessions the taxpayer is eligible to access (the four potential concessions being the 15-year rule, extra 50% reduction, retirement concession and the rollover).
Irrespective of the specific concession the taxpayer plans to access, a common set of initial qualifying conditions need to be met before any of the four concessions can be accessed. Known as the ‘basic conditions’, these initial criteria entail three main aspects when a sale of shares or units is involved, being:
- The vendor:
- Is a CGT small business entity, meaning that they carry on a business with a turnover (including related parties) of less than $2 million; or
- They pass the maximum net asset value test, whereby their assets, combined with those of related parties, is no more than $6 million;
- The shares satisfy the active asset test, whereby for the majority of the time the shares have been owned, at least 80% of the assets of the company/trust have been business assets (rather than passive style assets); and
- The CGT concession stakeholder requirement is met, which broadly requires the party, or their spouse, to have owned at least 20% of the shares in the company (or units in the unit trust).
Although the basic conditions only have three main aspects, they have always been challenging to apply. Some of these challenges have surrounded which related parties (known as ‘connected entities’ and ‘affiliates’) to include in your analysis of the ‘turnover’ or ‘net asset’ tests; which assets are considered business or passive under the ‘active asset test’; or how the concessions apply where a family trust is selling the shares or units.
The proposed changes
The proposals currently before Parliament don’t seek to remove any of the above basic conditions, but rather add three additional basic conditions, being:
- A further technical consideration of the CGT small business entity test, which essentially tightens how that test is to be applied;
- Applying a modified version of the CGT small business entity ($2 million turnover) test or modified $6 million maximum net asset value test at the company/trust level (in addition to applying it at the shareholder/unitholder level); and
- Calculating the active asset test again, using a modified set of rules.
While the proposed changes are likely to achieve some of their stated intention of being integrity measures to clamp down on inappropriate access to the concessions, they will unfortunately impact on every sale of shares or units where the vendor wishes to access the concessions. Alarmingly, the changes are proposed to apply from 1 July 2017.
The changes will add significant complexity to determining if concessions can be accessed, and will mean that many common scenarios which would have previously been able to qualify for the concessions will no longer be able to access the concessions at all, for example:
- Under the previous rules, a person whose only asset was shares worth $1.3 million (being 20% of the shares in a company worth $6.5 million) may’ve been able to access the concessions if they sold their shares, as would a shareholder who sold 100% of a company worth $5.9 million. Under the proposed changes, the person who owns 100% of the company worth $5.9 million may still be eligible for the concessions on a sale, but the person whose only asset is a parcel of shares worth $1.3 million would no longer be eligible for the concessions on a sale of their shares because of the new additional net asset value test;
- An individual who owns shares in a company which had subsidiaries, or investments in other businesses, may’ve comfortably met the active asset under the existing rules, as all the assets are essentially business assets (rather than passive style assets, such as term deposits or loans). However, under the proposed changes, those same investments in active trading businesses may be considered ‘passive’ style investments under the new active asset test and result in the small business concessions not being available on a sale of shares. Structures with subsidiary companies can thus be particularly problematic under the new rules.
How do you deal with the changes?
Through careful planning, it should still be possible for many clients to access the small business CGT concessions on the sale of shares or units, however determining eligibility is no longer a simple task. What is clear is that the proposed changes will make it more important than ever that a client’s structure is carefully planned and that their eligibility for the concessions is considered well before any sale is likely to take place.
In planning for the concessions, all current structures should be reconsidered, with particular attention paid to:
- Whether a company or unit trust is the appropriate entity to operate a business through. Is a family (discretionary) trust or a partnership a more appropriate structure?
- Should a company be paying more, or less, dividends out to shareholders each year?
- Should a business be operated through multiple companies rather than everything in one company?
- Will having a holding company help, or hinder, with eligibility for the proposed concessions?
- Should you hold investments in other businesses through a company? A trust? Individually? A holding company? An SMSF?
Want to know more?
We have advised thousands of small to medium businesses, their owners and their accountants on how the small business CGT concessions apply to their circumstances, or how to structure their affairs in a manner which could allow them to access the concessions in the future. If you are in any doubt as to how the concessions may apply to you or your client, please contact us to discuss your situation.
Disclaimer: The contents of this article are in the nature of general comments only, and are not to be used, relied or acted upon without seeking further professional advice. William Buck accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person using, relying on, or acting upon the comments, information and ideas contained in this article. Liability limited by a scheme approved under Professional Standards Legislation.