On 8 February 2018, The Coalition Government released exposure draft legislation and explanatory material for public consultation related to integrity improvements to the small business capital gains tax (CGT) concessions.

The small business CGT concessions measure was announced in the 2018 Budget as part of the tax integrity package. These concessions will continue to be available to genuine small business taxpayers with an aggregated turnover of less than $2 million or business net assets less than $6 million.

Under the proposed amendments, from 1 July 2017, the small business CGT concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business.

This is an integrity rule designed to prevent taxpayers from accessing these concessions for assets which are unrelated to their small business, such as by arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.

Before accessing the SBE CGT concession, the amendment proposes that extra additional basic conditions be satisfied if the CGT asset is a share in a company or an interest in trust (the object entity).

Modified active asset test

In order to satisfy the new condition, at least 80 per cent of the sum of the following must relate to active assets:

  • total market value of the assets of the object entity (disregarding any share in companies or interest in trust), and
  • total market value of the assets of any later entity, in which the object entity has a small business participation percentage, multiplied by that percentage

Further, the later entity must be:

  • either a CGT small business entities with less than $2 million annual turnover, or
  • satisfied that maximum net asset value test in relation to capital gain, and in which the taxpayer or their spouse has a small business participation percentage of at least 20 per cent

CGT small business entity

All the relevant CGT small business entities, including all the related later entities must have been carrying on business immediately prior to the CGT event. This ensures that entities do not benefit from this concession where the relevant business activities are remote from the relevant disposal.

Condition relating to the object entity

The object entity must have carried on a business immediately prior to the CGT event happening, and either:

  • be a CGT small business entity with less than $2 million annual turnover, or
  • satisfy the maximum net asset value test in relation to the capital gain.

This proposed amendment is to prevent the concession being available for an interest in entities that are not carrying on a business prior to the CGT event occurring or are carrying on a business that is not a small business as it has both substantial aggregate turnover and net assets.

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