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Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Improving access to Capital Gains Concessions

By way of background, small and medium sized business owners can potentially access one or more of the following six CGT concessions to reduce their capital gains tax liability when selling a business, if relevant conditions are met.

1. Pre or post CGT business?

Firstly, if the business commenced before 20 September 1985 and the same business was carried on since its inception, then any capital gain on the sale of business goodwill will generally not be taxable.

However, if the company’s assets include post-CGT capital appreciating assets, where post-CGT assets (other than trading stock) comprise more than 75 per cent the net value of the company, the business owner may be liable to CGT, even when selling pre-CGT shares in a business. The same applies to sales of pre-CGT units where businesses are held in unit trusts.

In the event that a taxable capital gain arises from the sale of a business, then the CGT liability may be reduced or eliminated by one or more of the remaining five CGT concessions, as outlined.

2. The general 50 per cent CGT discount

A general 50 per cent CGT discount is available to non-company business (and non business) taxpayers who have held the relevant assets for more than 12 months. Companies are not able to access this discount; however, an individual selling shares in a company would be eligible.

For small business, any remaining capital gain might be further decreased by the following four CGT concessions, irrespective of whether access to this discount is available.

3. The CGT small business concessions (‘SB concessions’)

The four Small Business CGT Concessions are:

• 15 year exemption – a full CGT exemption on the disposal of a business held for 15 years. If this applies, the capital gain will be reduced to nil. Further concessions need to be considered.

• 50 per cent discount – a further 50 per cent discount on any capital gain. This means that if the general 50 per cent discount also applies, the taxable capital gain can be reduced to 25 per cent.

• Retirement concession – any remaining capital gain can be further reduced if a payment (up to a lifetime limit of $500,000 per person) is made to the owner’s superannuation fund, or, in the case of a company or a unit trust capital gain to a “CGT stakeholder”, which is typically an individual with a 20 per cent direct or indirect stake in the company or unit trust. Such payments do not attract the 15 per cent superannuation fund “contributions tax” and are not counted towards the maximum non-deductible superannuation contribution limit. If the recipient of the remaining capital gain is over 55 years of age at the time his/her tax return needs to be lodged, there is no requirement to pay any amount into superannuation to get this exemption.

• Replacement Asset Rollover – Finally, where any remaining capital gain is reinvested in business assets (or broadly, in at least 20 per cent of the shares or unites in small business entities), tax on the remaining capital gain can be deferred.

Accessing the small business CGT concessions

In order to access any of the four SB concessions, two critical conditions must be met. Firstly, the relevant asset being sold must be an “active asset”, which is broadly an asset used or held ready for use in a business carried on by the taxpayer, or certain associates. Shares in a company and units in a unit trust can also be “active assets” if certain conditions are met.

Secondly, either one of the following thresholds must be met:

• The entity is a “small business entity”, which is an entity that carries on a business, and has an aggregated turnover of less than $2 million, excluding GST; or’

• The entity satisfies the “maximum net asset value test”. This means that the total of the net value of CGT assets owned by the taxpayer, and certain associates, does not exceed $6 million.

Passively held CGT

From July 1 2007, the $2 million threshold test has been expanded to be available in situations where valuable assets, such as business property is held in a separate entity to the business entity, say, for asset protection purposes. For example, a factory might be held in a separate entity from the business and leased to the business. Previously, for the entity that owned the factory, but did not run the business, access to the SB concessions via the $2 million threshold test was denied on sale of the factory.

For business sales after 1 July 2007, access to the $2 million threshold test is potentially available, when the factory owing entity is an “affiliate” or a “connected entity”, to the business entity with a turnover of less than $2 million (GST exclusive).

CGT assets used by partnerships

Similarly, up until 30 June 2007, a partner who held an asset separately from the partnership, but allowed the partnership to use that in the running of the partnership business, could not access the SB concessions via the $2 million turnover test.

However, where the asset was owned collectively in partnership, access was available.

From 1 July 2007, the inconsistency has been eliminated by extending access to the $2 million threshold test to a partner that owns a CGT asset separately, but allows that asset to be used by the partnership, provided certain conditions were met.

For example, assume Bill alone owns a supermarket building, which is used in the business of a partnership carried on by both Bill and Ben trading as the “Bill and Ben Supermarket”.

From 1 July 2007, Bill can access the SB concessions in respect of the sale of the supermarket building, if the aggregated turnover of the partnership, as calculated for Bill’s interest, is less than $2 million.

Spouses and children taken to be affiliates

From 1 July 2007, a business taxpayer’s spouse or child (under 18 years old) is treated as an “affiliate” in a wider range of situations. This potentially makes it easier  to access the $2 million turnover test as the assets owned by affiliates (and entities owned by affiliates and spouses), and used in the business, but not owned by the business entity, can potentially more easily qualify for the SB concessions.’

Where, say, land is owned by an entity (the land owner), that is not the business entity, but the land is used in the business, it is relevant for the landowner to be “connected with” or to be an “affiliate” of the business entity, as this results in the land being treated as an “active asset”. It is necessary for the land to be an “active asset” to qualify for the SB concessions on sale of the land.

This new measure could potentially cover land owned by an entity, which is owned by a spouse of a business tax payer.

However, a drawback is that the new rule may bring in new “affiliates” and more entities “connected” with the business taxpayer, in calculating the $6 million maximum net asset value test.

Conclusion

These amendments potentially allow better opportunities for small business taxpayers to achieve both more tax efficient outcomes and asset protection objectives by holding capital appreciating assets in separate vehicles to the business entity. Assets, such as real property and IP, could potentially be held in separate entities but leased or licensed to the business entity.

Proper structuring on establishment of the business, as well as advice on sale remains critical to best access these concessions, which can, in the best case, eliminate tax on capital gains on restructures or sales of small businesses, and assets used by small business.

Mark Northeast

My business, May, 2009

 


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