Further changes are expected to be made to the small business CGT concessions. These particular changes are intended to be applied in relation to CGT events involving shares in a company or units in a trust and specifically outline changes to the existing active asset test.
The new laws will apply in relation to CGT events that happen on or after 8 February 2018 (rather than retrospectively back to 1 July 2017 as originally proposed).
Changes only apply to shares and units
The changes only apply to circumstances where the CGT event happens in relation to shares in a company or units in a trust.
If a client is selling a direct interest in business assets e.g. goodwill or land building used in the business), these changes will not impact them.
The changes apply in addition to existing conditions for the application of the small business CGT event.
If SBE, the shareholder must be carrying on business just before the CGT event.
If the taxpayer is seeking to access the small business CGT concessions on the sale of shares or units as a CGT small business entity, they must be carrying on a business just before the CGT event.
This condition will not apply if the taxpayer satisfies the $6 million maximum net asset value test.
Company or trust must satisfy certain tests
The company or trust (in which shares or units are being sold) must satisfy either of the following conditions (both of which are subject to certain modifications from the ‘standard’ way they operate):
- Be CGT small business entity; or
- Satisfy the maximum net asset value test.
When determining whether the company or trust is a CGT small business entity or whether it is satisfied with the maximum net asset value test, the turnover and assets of entities that control the company or trust are disregarded in this modified test.
In assessing whether the company or trust satisfied the tests (CGT small business entity or maximum net asset value test), it is necessary to also count the assets of turnover of entities that:
- The company or trust controls. For these purposes, the control percentage will drop from the standard 40% to 20%, which will potentially bring ore entities into the test; or
- Are affiliated of the company or trust.
Active asset test
Under the previous law, there is a specific active asset test for shares and units. This test requires the market value of the following assets of the company or trust to be at least 80% of the total market value of the assets of the company or trust:
- Active assets;
- Financial instruments that are inherently connected with the business carried on the company or trust; and
- Cash that is inherently connected with the business carried on by the company or trust.
The new law substantially changes this active asset test.
Firstly, if a company or trust owns shares or units in another entity (the later entity), an additional active asset test will need to be satisfied. For the purposes of the additional active assets test, the shares/units in the later entity will not be considered active or non-active assets on their own.
Instead, the 80% test will need to be performed using the total assets of the object entity, and the later entity. The latter entity’s assets are included in the test only to the extent of the objects entity’s small business participation percentage in that later entity.
The assets held by the later entity will only be active where:
- The latter entity is a CGT small business entity or it satisfies the maximum net asset value test (in the modified manner outlived above); and
- The taxpayer (i.e. the person selling the shares or units) has a small business participation percentage of at least 20% or is a CGT concession stakeholder in the latter entity.
Secondly, an integrity measure is proposed to ensure that any cash or financial instrument acquired for the purpose that included assisting an entity to otherwise satisfy the additional active assets test is not allowed as an active asset. With regard to this specific integrity measure, it is noted in the Explanatory Memorandum that “its application is expected to be limited.
For more information about how these proposed changes might affect you and your business, contact The Quinn Group on (02) 9223 9166 or submit an online enquiry.