SMALL BUSINESS CGT CONCESSIONS

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Introduction to Small Business CGT Concessions

The small business CGT concessions are designed to reduce the tax burden on small business taxpayers.

With less CGT to pay, small business taxpayers can:

  • keep more of their hard-earned money; and/or
  • boost their retirement savings.

Small business taxpayers can trigger CGT when they dispose of an asset, for example:

  • a company, trust or partnership selling its business (including goodwill);
  • a shareholder in a company selling their shares; or
  • a unit holder in a unit trust selling their units.

The 4 Types of Small Business CGT Concessions

There are 4 types of small business capital gains tax (CGT) concessions. Small business taxpayers may be eligible for one or more of them, as outlined below.

15-year exemption

The 15-year exemption provides a full exemption for the entire capital gain. This type of small business CGT concession applies where, among other things:

  • the business has been carried on for at least 15 years;
  • the individual carrying on the small business, or a significant stakeholder in the entity that carries on the small business is at least 55 years old; and
  • the disposal occurs in connection with their retirement, or they are permanently incapacitated.

It is possible to use this type of small business CGT concession for superannuation benefits. Where the 15-year exemption applies, small business taxpayers can contribute up to $1,615,000 (for FY2022) to superannuation outside the general contribution caps (specific financial advice should be sought as to whether this is appropriate in their particular circumstances).

50% active asset reduction

If the 15-year exemption is not available, small business taxpayers can apply the 50% active asset reduction, which reduces the capital gain by 50%.

The 50% active asset reduction applies in addition to the general 50% CGT discount (where available) for a net 75% reduction in the capital gain, for example:

              Gross Capital Gain                           $1,000,000

              General 50% CGT Discount          $500,000

              50% Active Asset Reduction         $250,000

              Net Capital Gain                                $250,000

The small business active asset reduction is optional and there may be circumstances where it is beneficial to forgo this concession and utilise more of the small business retirement exemption (up to the relevant lifetime cap outlined below).

Small business retirement exemption

Unlike the 15-year exemption, and despite its name, the small business retirement exemption does not require that the relevant individual actually retires.

The small business retirement exemption can apply to shelter a capital gain from tax, subject to a lifetime limit of $500,000, however:

  • where the relevant individual is under 55 years old at the relevant time – the amount sheltered from tax under the small business retirement exemption must be contributed to a complying superannuation fund within a specified time; and
  • where the relevant individual is 55 years or older at the relevant time – they can simply keep the cash.

Returning to the example above, after applying the general 50% CGT discount and the 50% active asset reduction, the small business taxpayer could apply the small business retirement exemption to reduce the net capital to nil (subject to the $500,000 lifetime cap).

Small business rollover

The small business rollover allows small business taxpayers to:

  • defer the tax payable on the original capital gain; and
  • use the funds sheltered from tax to acquire a replacement asset (such as a new business) within a specified period up to 2 years after the original disposal.

Where small business rollover applies, the tax on the original gain is generally deferred until the disposal of the replacement asset.

If and to the extent that a replacement asset is not acquired within the specified period up to 2 years after the original disposal, a capital gain is triggered at the end of the 2-year period.

Eligibility Conditions for Small Business CGT Concessions

The small business CGT concessions are subject to common basic conditions, with particular concessions having additional conditions over and above these common requirements.

The basic conditions for small business CGT concessions include:

  • a CGT event happens to a CGT asset (for example, the disposal of a CGT asset triggers CGT event A1);
  • the CGT event would otherwise trigger a capital gain;
  • the taxpayer:
    • is a CGT small business entity, that is, broadly, it has aggregated turnover of less than $2,000,000; or
    • satisfies the maximum net asset value test (NAVT); and
  • the CGT asset sold satisfies the active asset test.

There are additional basic conditions for small business CGT concessions where the relevant disposal relates to shares in a company or interests (including units) in a trust.

There are various defined terms in relation to the eligibility conditions of small business CGT concessions, such as:

  • “aggregated turnover”, which includes the turnover of the relevant entity itself, as well as any connected entities or affiliates (which are themselves defined terms);
  • the NAVT requires that the relevant entity itself, together with any connected entities or affiliates has net assets of no more than $6m. However, this is not always as straightforward as it appears as:
    • once an individual or entity holds at least 40% of another entity (such as a company or trust), you generally include 100% of its market value for the purposes the NAVT, for example, if an individual held 60% of the shares in a company worth $8m and no other assets, their shares are worth $4.8m ($8m x 60%) but as a connected entity you include the full $8m in determining whether they satisfied the NAVT (and would, therefore, fail); and
    • the NAVT excludes certain “big ticket” items such as:
      • an individual’s main residence;
      • an individual’s superannuation interests; and
      • purely personal assets (e.g., a holiday home that is not rented out);
  • the active asset test, which requires that the relevant asset was an active asset for:
    • if the asset was held for 15 years or less – at least half the ownership period;
    • if the asset was held for more than 15 years – at least 7.5 years; and
  • an active asset is:
    • an asset used, or held for use, in the course of carrying on a business that is carried on by the relevant taxpayer, a connected entity or an affiliate; or
    • an intangible asset inherently connected with the business carried on by the relevant taxpayer, a connected entity, or an affiliate (e.g., goodwill).

However, notwithstanding the general meaning of an active asset above, certain assets are specifically excluded from being active assets, such as assets whose main use is to derive rent.

This sounds problematic as it would appear to exclude the common structuring scenario whereby a small business operates from premises leased from a related party (e.g., a company leasing a factory or office space owned by its shareholders).

However, the ATO takes the view that the “passive rent” exclusion does not apply (and, therefore, the relevant premises can constitute an active asset) where the premises are leased to a connected entity carrying on the relevant business.

Can a company access small business CGT concessions?

Yes. Like other taxpayers, a company can access the small business CGT concessions, provided that they meet the relevant conditions in their particular circumstances.

Small business CGT concessions in 2021

Whilst there have not been any legislative amendments in 2021 in this regard, it is critical to keep up to date with these changes from time to time, as well as any interpretative changes whether at common law or from an administrative (ATO) perspective.

For more information on the small business CGT concessions, see our Explainer Video here.

Contact Mosaic Tax Legal, the experts in ATO small business CGT concessions.

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