CGT small business concessions and contributions to super
Basic conditions for small business CGT concessions
Where a capital gain arises from the sale of a CGT asset(s), there are two basic conditions that must be met to qualify for the small business CGT concessions:
- he entity must be either:
- a CGT small business entity or a partner6 in a partnership that is a CGT small business entity or
- the net value of assets that the entity and related entities own must not exceed $6 million and
- the CGT asset must satisfy the active asset test.
Additional basic conditions must be met if the asset being sold is a share in a company or an interest in a trust.
There are also further rules specific to each CGT small business concession. Refer to sections 8.6 - 8.9 for further requirements for each specific small business CGT concessions.
Maximum net asset value test or CGT small business entity test
The first basic condition is that the taxpayer (entity wanting to claim the small business CGT concessions) must either satisfy the net asset value test, or the CGT small business entity test (also known as the aggregated turnover test).
Maximum net asset value test
To satisfy the maximum net asset value test, the net value of assets of the taxpayer, their affiliates and connected entities, just prior to the CGT event, must not exceed $6 million.
In calculating the net value of CGT assets, some assets are disregarded, including:
- assets held by the taxpayer's connected entities and associates unless they are used in a business of the taxpayer or their connected entity --assets held solely for personal use and enjoyment by the taxpayer
- the taxpayer's main residence (if not being used to produce income)
- superannuation interests and life insurance policies.
CGT small business entity (aggregated turnover test)
A CGT small business entity is an entity that carries on a business during the financial year and the aggregate of its annual turnover plus the annual turnover of connected entities and affiliates satisfies the turnover test.
An entity will generally satisfy the turnover test for small business CGT concessions if it is carrying on a business and its aggregated turnover:
- was less than $2 million in the previous income year (and it carried on a business in that year)
- is estimated to be less than $2 million for the current year, or
- is actually less than $2 million at the end of the current year.
Note: The small business turnover threshold is $10 million when determining access to most small business tax concessions, however the turnover for the small business CGT concessions is $2 million.
The CGT small business entity test can also be satisfied where:
- a taxpayer owns an asset that is used by an affiliate or connected entity that is a small business entity
- a taxpayer is a partner7 in a partnership that is a small business entity and the CGT asset is a partnership asset or a CGT asset used by the partnership.
Active asset test
An active asset is generally an asset that is used, or held ready for use, in the course of carrying on a business by the taxpayer, their affiliates or connected entities.
An asset does not have to be an 'active asset' immediately before the CGT event. A CGT asset meets the active asset test if:
- it has been owned for 15 years or less and the asset was an active asset for at least half of the ownership period, or
- it has been owned for more than 15 years and the asset was an active asset for at least 7.5 years.
The ownership period starts from the time the taxpayer owns the asset and ends at the time of the CGT event or if the business ceased within the last 12 months, at the cessation of the business.
A share in an Australian resident company or unit in an Australian resident trust can be an active asset if the market value of the active assets of the company or trust is at least 80% or more of the market value of all of the assets of the company or trust.
Under proposed legislation8, a modified active asset test may apply from 1 July 2017, where the asset being sold is a share in an Australian resident company or unit in an Australian resident trust. See Proposed modified active asset test below.
Additional basic conditions for sale of shares or units
Where the asset being sold is a share in an Australian company or an interest in a resident trust (the object entity), the taxpayer selling the asset and claiming the CGT exemption must pass the first two basic conditions discussed above (CGT small business entity or maximum net assets not exceeding $6 million; and CGT asset is an active asset) as well one of the following basic conditions. Just before the CGT event, the taxpayer:
- must be a CGT concession stakeholder of the object company or trust, or
- CGT concession stakeholders in the object company or trust must together have a small business participation percentage in the taxpayer of at least 90%.
In the 2017 Federal Budget, the Government proposed to amend the small business CGT concessions to ensure the concessions can only be accessed in relation to assets used in a small business or an ownership interest in a small business.
The Government was concerned that some taxpayers have been able to access the small business concessions for assets which are unrelated to a small business. If the Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 becomes law, the two existing conditions above will still apply and additional basic conditions will be implemented for CGT events from 1 July 2017 for a taxpayer seeking to apply the CGT small business concessions upon the sale of a share in a company or an interest in a trust (the object entity).
Broadly under the proposed amendments, the following new additional conditions will apply:
Proposed condition relating to the taxpayer
The taxpayer must generally have carried on the business just prior to the CGT event occurring. This ensures that entities do not benefit from this concession where the relevant business activities are too remote to justify the entity receiving a concession for business activities.
This condition does not apply to taxpayers that satisfy the maximum net asset value test in relation to the CGT event. In this case, eligibility to access the concession relates to the level of assets owned by the taxpayer and their related entities, not any related small business activities.
Proposed condition relating to the object company or trust
The object entity must be a CGT small business entity for the income year or satisfy the maximum net asset value test.
This prevents the concession being available for interests in entities that are carrying on a business that is not a small business as it has both substantial aggregate turnover and net assets.
When working out if the object entity is a CGT small business entity or satisfies the maximum net asset value test, the turnover or assets of entities that may control the object entity are disregarded. This ensures that the outcomes for taxpayers do not depend upon the income or assets of third parties.
For these purposes, an entity is treated as controlling another entity if it has an interest of 20 per cent or more, rather than 40 per cent or more. This means that more entities are considered to be 'connected with' one another for the purpose of this test and need to count the assets or turnover of the other entity towards their aggregate turnover or the total net value of their CGT assets.
Proposed modified active asset test
Shares or interests in the object entity must satisfy a modified active asset test. This test looks through shares in companies and interests in trusts to the activities and assets of the underlying entities. These conditions apply on an entity basis. A taxpayer at the top of a chain of companies or trusts may not qualify for the small business concessions in respect of shares or interests it holds (for example, because the chain includes an entity with an interest in a large business). However, another taxpayer in the same chain of companies or trusts may qualify for the concessions in respect of shares or interests it holds in a small business.
In order to satisfy the new modified active asset test, for the lesser of 7.5 years or at least half the period a taxpayer has held the shares or interests, at least 80 per cent
of the sum of the total market value of the assets of:
- the object entity (disregarding any shares in companies or interests in trusts) and
- any entity (a later entity) in which the object entity had a small business participation percentage of greater than zero, multiplied by that percentage
must have related to assets that are:
- active assets, or
- cash or financial instruments that are inherently connected with a business carried on by the object entity or a later entity.
If the assets above are held by a later entity, the assets will only be active at a time if the later entity is an entity:
- that is, at the relevant time, either:
- a CGT small business entity; or
- satisfies that maximum net asset value test in relation to the capital gain; and
- in which the taxpayer has a small business participation percentage of at least 20 per cent or is a CGT concession stakeholder at the relevant time.
Last modified: Thursday, November 15, 2018