Issue #2
HAPPY ANNIVERSARY
SMALL BUSINESS CGT CONCESSION AMENDMENTS – 12 MONTHS ON
It seems like an eternity ago that the recommendations emanating from the Board of Taxation review of the small business CGT concessions were announced as part of the 2006/7 Federal Budget and subsequently enacted.
30 June 2007 marked the end of 12 months since the first tranche of announced recommendations took effect. Below is a link to an ATO fact sheet containing a comparison of the ‘old’ law and the ‘new’ law to apply from 1 July 2006:
http://www.ato.gov.au/businesses/content.asp?doc=/content/00097804.htm
From 1 July 2007 two further changes apply: the net asset value test has been increased to $6 million and taxpayers qualifying as small business entities do not have to meet the net asset value test.
The two primary drivers for the amendments were to reduce the compliance costs for small business as well as increase the availability of the concessions.
Have compliance costs been reduced?
Simply based on the number of queries we have had from practitioners over the last 12 months we would have to say that at this stage it seems compliance costs have not reduced!
Maybe once the law has bedded down and practioners are more familiar with the provisions this may change.
Has availability of the concessions increased?
Prior to the changes, the inability of discretionary trusts or companies to access the concessions upon the sale of active assets that were shares/units in another entity prevented a significant number of taxpayers from accessing the concessions.
Many family companies were owned by family trusts essentially controlled by ‘mum and dad’. For these entities not to be able to benefit under the concessions was ludicrous as the concessions are squarely aimed and ‘mums and dads’ and their entities.
The new look through approach to establish a significant individual and the alternative 90% test for non-individuals holding shares/units now alleviates this problem thereby increasing access to the concessions significantly.
Further, the ability to have up to eight CGT concession stakeholders now allows more than two people to go into business together using a company or unit trust structure. This also allows a smoother transition out of a business structure for example where the children of mum and dad can be introduced into the business via mum and dad selling/transferring parcels of shares/units across to their children.
Changes to the active asset test now enable a former business asset to be leased for a period of time after its active asset status ceases. This will greatly benefit taxpayers approaching retirement who want to divest themselves of the business activities (for example selling the business) but hold onto an income stream (e.g. retaining the business premises for renting out to the new owner).
Our experience to date indicates that availability of the concessions has increased as a result of the amendments. However, one other change that has occurred from 1 July 2007 is the replacement of the ‘small business CGT affiliate’ definition with the term ‘affiliate’.
An individual or company is an ‘affiliate’ of an entity where that individual or company acts, or could reasonably be expected to act:
• in accordance with the entity’s directions or wishes in relation to the affairs of that individual or company’s business; or
• in concert with the entity in relation to the affairs of the individual or company’s business.
A spouse or a child under the age of 18 years is no longer automatically an affiliate. Further, only an individual or company can be an affiliate of another entity. Entities (for tax purposes) such as trusts, partnerships, and superannuation funds are not capable of being affiliates of entities.
It is our view that the affiliate concept will cause difficulties in time as entities that were once clearly affiliated with each other under the small business CGT affiliate definition may now no longer be affiliated. We will examine the ‘affiliate’ issue in more detail in a later edition of ‘The Assessment’.
Any further fine tuning required?
In our view there are two main areas of the concessions that could do with some further fine tuning.
Firstly, the new small business entity exclusion from the net asset value test is of no use to any entity that owns an active asset but that is not carrying on business.
For example, if a large farming property on the fringe of a capital city is owned by mum and dad and a company they own operates the farming business, mum and dad would not be able to rely on the small business entity exclusion from the net asset value test if they were to sell the property as they are not carrying on business.
A large rural property on a capital city’s fringes, especially one located in a population growth corridor, could be worth several million dollars and could cause the $6 million net asset value test to be breached. On the basis the turnover test is met by the group the active asset concessions would be unavailable in this scenario.
We believe the small business entity exclusion should be extended so as to apply to a small business entity and its connected entities.
The other area that causes a lot of angst amongst practitioners is the net asset value test. Can anyone explain simply how it works?
There still appears to be some anomalies in the test. Take the following as an example:
A partnership of two discretionary trusts owns a commercial property and other assets with a net asset value of $6m. A company owned by the two trusts and that operates its business from the commercial property has a net asset value of $1.4m.
Ignoring any other assets so as to make the illustration easier to follow, if the trusts sold the property both trusts would pass the $6m net asset value test in their own right.
However, if the company were to sell its business the $6m net asset value test would be failed. Why? Because as both trusts control the company they are both connected entities of the company and therefore their net asset values (less the shares held in the company) must be added to the company’s net asset value.
The net asset value test may be the undoing of many taxpayers that have applied the small business concessions on the basis the test is met where certain assets have been incorrectly omitted or where connected entities have not been brought into the calculation.
Time will only tell! As we stated earlier, the devil is in the detail.
This edition of ‘The Assessment’ was prepared by Rob Power. If you have any comments in regards to the contents of this edition please feel free to pass them on to Rob at robp@webbmartinconsulting.com.au.
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