After careful deliberation, the Bill limiting access to the Small Business Capital Gains Tax (CGT) Concessions, Treasury Laws Amendment (Tax Integrity and Other Measures), was passed in Parliament on 20 September 2018.
The recent finalisation of the Bill means a considerable change to existing CGT concessions in what was an integrity approach to access and eligibility. Unfortunately, the amended Bill has served to make an already complicated beast even more difficult to work with.
For taxpayers seeking CGT relief in relation to a share in a company or interest in a trust, the amended legislation includes requirements for additional basic conditions. The amended legislation requires both the taxpayer and the entity in which the shares or interest are held (the object entity) to be a small business entity (satisfy the $2 million aggregated turnover test) or satisfy the $6 million net asset value test.
Of considerable relief to many affected by these changes is that while the original Bill submitted to Parliament intended a retrospective legislation start date of 1 July 2017, after considerable lobbying the new legislation will now apply to CGT events on or after 8 February 2018.
Back to basics
The aim of introducing CGT concessions was to reduce tax payable on the sale of eligible business assets; including a share in a company and an interest in a trust.
There were three main basic conditions that applied prior to the Bill being introduced which included:
- The entity must be a CGT small business entity with an aggregated turnover of less than $2 million, or satisfy the $6 million net asset value test;
- The CGT asset must be an active asset; and
- Where the asset is a share in a company or an interest in a trust, there must be a CGT Concession stakeholder (small business participation % of at least 20%) in the object company or trust; or CGT Concession Stakeholders in the object company or trust together have a small business participation percentage in the entity claiming the concession of at least 90%.
(Conditions 1 and 2 remain the same while condition 3 was repealed and replaced, see below)
The New CGT world order
For CGT events that occur on or after 8 February 2018, additional basic conditions have now been added where the CGT event is in relation to a share in a company or an interest in a trust.
The following conditions replace the third main basic condition above:
- The relevant CGT asset must satisfy the modified active asset test. Broadly speaking, an entity will satisfy the modified active asset test if it satisfied the active asset test and the following assumptions made:
- The financial instruments and cash of must be inherently connected with the business and were not acquired for a purpose that included assisting the entity to satisfy the test; and
- All shares and units held by the object entity are excluded. Instead, a look-through approach will be taken with the underlying assets of the object company or trust.
- Unless the taxpayer satisfies the maximum net asset value test, the taxpayer must be carrying on a business just before the CGT event;
- The object entity must be a CGT small business entity for the income year or satisfy the maximum net asset value test; and
- Just before the CGT event either:
- The taxpayer is a CGT Concession stakeholder in the object entity, or
- The CGT Concession stakeholder in the object entity has a small business participation percentage in the taxpayer or at least 90%.
It is also important to note that all references to connected entities in the new legislation denote a reduced control percentage from 40% to 20%. This will have a dramatic impact on taxpayers with interest in larger entities of more than 20%.
When it comes to the disposal of shares in a company or interest in a trust it is still possible for taxpayers to access CGT concessions.
However, navigating the new rules will certainly make this exercise more complex. Seeking advice from an informed Tax Agent is imperative to ensure determination of the correct structure in order to benefit from the CGT Concessions following these amendments.
Looking for more information on Capital Gains Tax (CGT)? Let RSM assist, please contact your local RSM office.