A bill containing changes to the Small Business CGT Concessions (‘SBC’) has now been introduced into Parliament. It is Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 (Cth) (‘the Bill’). According to the Bill, when passed, the changes will apply in relation to CGT events happening on or after 1 July 2017. That is, the changes are retrospective.
The first thing to note is that the changes only apply where the asset being sold, or in respect of which the CGT event happens, is a share in a company or an interest in a trust (e.g. a unit in a unit trust). If the CGT event happens in relation to some other type of asset the changes do not apply.
The changes were introduced to stop taxpayers accessing the SBC in certain unintended circumstances. Below you will find examples demonstrating the operation of these changes.
Bob owns 20% of the shares in Bigit Pty Ltd, a private company that develops and sells special IT systems to banks. The company’s market value is $50,000,000 and so Bob’s shares are worth $10,000,000. Bob does not work in Bigit Pty Ltd, he simply invested in it when a few friends started it up and has seen his investment grow. If Bob sells his shares he will make a very large capital gain. He would not be entitled to the SBC as he would not be able to satisfy the basic conditions.
Bob is an accountant employed at a mid-sized accounting firm. Bob decides he wants to run his own practice and, so, buys a small accounting practice which has an annual turnover of $300,000. 8 months later Bob sells his shares in Bigit Pty Ltd and makes a $10,000,000 capital gain. Under the current rules Bob can now apply the SBC to this gain. Bob is a small business entity under section 152-10(1)(c)(i) of the Income Tax Assessment Act 1997 (Cth) (‘the ITA Act’). The shares satisfy the active asset test because at all times the 80% test in section 152-40(3) of the ITA Act was satisfied. Bob is a CGT concession stakeholder in Bigit Pty Ltd and so the additional basic condition in section 152-10(2) of the ITA Act is satisfied.
Under the changes in the Bill, section 152-10(2) of the ITA Act is being replaced so that where shares or units are sold additional conditions must be satisfied before the taxpayer can access the SBC. In addition to the current requirements the following applies:
- a modified active asset test must be satisfied;
- if the taxpayer does not satisfy the maximum net asset value test then the taxpayer must be carrying on a business just before the CGT event; and
- the object entity (i.e. the company or unit trust in which the taxpayer owns shares or units) must also satisfy a modified MNAV test or small business entity test.
Thus, in the above example, as Bigit Pty Ltd is not a small business entity and cannot satisfy the MNAV test, Bob will not be eligible to apply the SBC to the gain made on the sale of his shares.
Unfortunately the changes will deny some taxpayers from applying the SBC in circumstances in which arguably they should be allowed to apply them. For example, where a shareholder owns 25% of the shares in a company that has a net value of $10,000,000 and a turnover of $3,000,000, and that shareholder wishes to sell their shares.
So, if a taxpayer now wishes to sell shares in a company or an interest in a trust and apply the SBC, the proposed changes must be carefully worked through to see if the new additional conditions can be satisfied.
Should you require assistance or advice regarding these proposed changes, please contact Rob Warnock or Patrick Cussen.