Small Business CGT concessions & the possible effects of the proposals

In the 2017-18 federal budget, the government announced that changes would be made to small business CGT concessions to address some integrity concerns.

When are these changes likely to apply and how might they affect you and your small business?

Timing of the concessions

The government stated that the changes would apply from 1 July 2017, but no specific details were released until the Treasury released the exposure draft legislation this February.

The main changes are detailed below.

The main changes to small business CGT concessions

The draft legislation changes the basic conditions that need to be met in order to apply the small business CGT concessions to a capital gain arising in relation to a share in a company or an interest in a trust.

These changes are complex and will make it more difficult for many shareholders or unitholders to access the concessions on the sale of shares or units from 1 July 2017.

Broadly, the proposed new conditions require that:

  • If the taxpayer selling the shares or units does not satisfy the $6m maximum net asset value test, they would generally need to have carried on a business just before the CGT event;
  • The company or trust being sold must have carried on a business just before the CGT event;
  • The company or trust must either be a CGT small business entity ($2m turnover threshold applies) or satisfy the $6m maximum net asset value test (the grouping rules will be modified in this instance); and
  • The shares or units must satisfy a modified active asset test that looks through to the activities and assets of the underlying entities.

How might this affect your small business?

Depending on the business structure adopted, these changes could prevent you from accessing the concessions.

This includes if you are selling interests in an entity that has been used to hold assets that are then leased or licenced to a related entity that operates the relevant business.

While the proposed changes are not yet law and may be adjusted before the final legislation is introduced to Parliament, both clients and practitioners need to be mindful of the fact that any changes could apply to CGT events that have already occurred as well as to future transactions.

Satisfying the proposed new active asset test

In order to satisfy the modified active asset test under the draft legislation, at least 80 percent of the sum of the following must be active assets (or certain cash and financial instruments as described below):

  • Total market value of the assets of the Object Entity (disregarding any shares in companies or interests in trusts), and
  • Total market value of the assets of any entity in which the Object Entity has a small business participation percentage of greater than zero (referred to in the draft legislation as a ‘later entity’) – multiplied by that percentage.

The current small business CGT concession rules treat shares or interests as active assets based on the underlying assets of the company or trust.

The modified test, however, looks through membership interests to include the proportionate amount of the value of the assets of other entities to which the membership interests ultimately relate

Practically, this may make it more difficult for you to satisfy the active asset test for capital gains relating to shares in a company or interests in a trust. It also increases the compliance burden of determining if the active asset test is met.

If you have any further questions about small business CGT concessions, contact us here.