CGT - Small Business Concessions

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions.  These are called the ‘basic conditions’.

Each concession also has further requirements that you must satisfy for the concession to apply (except for the small business 50% active asset reduction which applies if the basic conditions are satisfied).

The major basic conditions are in the form of three tests that must be satisfied:

1.    The taxpayer must be a Small Business Entity. To do that it must satisfy the $2million aggregated turnover test.

      OR, if it is not an SBE:

2.   It must satisfy the maximum net asset value test which sets a $6 million limit on the net value of assets that you and certain related entities can own (Increased from $5 million from 1/7/2007).

      And satisfy the active asset test.

3. If the CGT asset is a share in a company or interest in a trust:

> the taxpayer must satisfy a 20% significant individual test.  (This replaced the controlling individual test from 1/7/2006), and

> The individual claiming the concession must be a CGT concession stakeholder in the company or trust.

An individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero.  This participation percentage can be held directly or indirectly through one or more interposed entities.  The percentages are worked out in the same way as for the significant individual test.

To qualify as a significant individual, a person must have at least 20% of each class of the issued capital of the company with an entitlement to exercise voting power, receive dividend payments, or receive capital distributions.

Where a business is operated through a trust, a person passes the significant individual test if they receive at least 20 per cent of the income or capital distributed in the year the capital gain is made.

If they do not receive at least 20 per cent, then the small business participation percentage in the year that the capital gain is made, is calculated on the basis of the distributions made in the last income year in which the trustee made a distribution.

However, if the 15 year exemption is claimed the beneficiaries must have received at least 20 per cent of the income and capital distributions for all of the 15 years that the distributions were made.

Refer to the links below for more details on the recent changes to eligibility rules.

 

There are four small business CGT concessions available, namely:

> the small business 15-year exemption

> the small business 50% active asset reduction

> the small business retirement exemption, and

> the small business rollover.

These concessions may apply to CGT events (for example, the disposal of a CGT asset) that happen after 11.45am on 21 September 1999.  Any capital gain that results from a CGT event may be reduced or disregarded under the small business concessions if you satisfy certain conditions.

The ‘small business 15-year exemption’ provides a total exemption of a capital gain if you have continuously owned the CGT asset for at least 15 years and the relevant individual has reached their superannuation preservation age and retiring or is permanently incapacitated.

The ‘small business 50% active asset reduction’ provides a 50% reduction of a capital gain.

The ‘small business retirement exemption’ provides an exemption of capital gains up to a lifetime limit of $500,000. If the recipient is under their superannuation preservation age, the amount must be paid into a superannuation fund or RSA.  For an individual choosing the retirement exemption, there is no requirement to terminate any activity or cease business or retire.

The ‘small business rollover’ provides a deferral of a capital gain if a replacement asset is acquired. The deferred capital gain may later crystalize if the replacement asset is disposed of or its use changes in particular ways. This means you would make a capital gain equal to the deferred gain (in addition to any capital gain made on the disposal of the replacement asset).

If the ‘maximum net asset value’ test applies remember that exclusions include assets solely for personal use, private main residence and superannuation. Opportunities exist to transfer wealth to excluded assets prior to sale to bring the ‘net asset value’ below the threshold. Refer to the links below for more information on the 'net assets value test. 

A problem for companies

In general, where a company is eligible to apply for SBE CGT Concessions, part or all of the capital profits arising from a CGT event may be exempted from tax at the company level.

However, when the amounts are distributed to shareholders (via a dividend), the amount becomes ordinary income, and thus, taxable.
The company will have paid less tax on the capital gain and therefore may not have sufficient franking credits to pay a fully franked dividend.