Win For Small Business

The strategy: To make the most of the changed CGT concessions for small business.

How do I do that? The concessions were originally introduced to give small business owners some relief from capital gains tax. There are four key concessions. The first is a 15-year total CGT exemption that applies if you have owned the asset continuously for at least 15 years and are selling it because you are 55 or more and retiring, or you are permanently incapacitated. If you can't claim that exemption, there's also a 50 per cent active asset reduction which reduces your gain by 50 per cent on the sale of active assets - that is, assets used in the course of carrying out the business. The third exemption is the small business retirement exemption which provides a CGT exemption on gains of up to $500,000 (over your lifetime) if they're paid into a super fund (if you're under 55) or used for retirement. And the small business rollover allows you to defer the capital gain on the sale of an asset if a replacement asset is acquired. Following a review by the Board of Taxation, the Government announced in this year's budget that it will amend the concessions, with most changes applying from July 1 this year. It says the changes will cut compliance costs for small business and make the concessions more widely available. Proprietors disposing of their business after this date should be aware of how these changes can be used to cut their CGT bill. In some cases, it may be better to delay the sale of business assets until all the changes are in place.

So what's happening? The Board of Taxation made 39 recommendations, of which only one has been rejected. The most significant changes are to the three tests you must pass if you are to claim any of the concessions. To claim the concessions you and related entities can't own assets with a total net value of more than $5 million. From July 1, 2007, this will be lifted to $6 million.The active asset test requires that you must have used the asset you're claiming the exemption for in the course of running your business. Active assets can include intangibles such as goodwill but not passive or non-eligible assets such as loans, bonds and shares in other companies or share options. Under the rules, the asset must have been active for at least half the period of ownership and in active use just before the CGT event or be sold within 12 months of the business ceasing. Under the proposed rules, you'll also meet the test if the asset ceased to be active in the 12 months before it was sold - regardless of whether or not the business ceased. The third test applies where the asset is a share in a company or interest in a trust. This test requires a controlling individual to have held at least 50 per cent of the entity or, in the case of trusts, to have been beneficially entitled to at least 50 per cent of the trust's distributions. To claim the 15-year exemption, the controlling individual must have held that stake for the entire period of ownership. ING's head of technical services, Andrew Lowe, says this test effectively limits the CGT concessions to two controlling individuals (or one individual and spouse if the latter has an interest in the company or trust) and can be problematic where the ownership structure includes other interposed entities. Under the new rules the test will be replaced with a new "significant individual" test with that individual being required to hold only a 20 per cent interest in the entity. Lowe says the new test will also be able to be satisfied through one or more interposed entities. Effectively, he says, this allows more taxpayers to qualify for the concessions. To qualify for the 15-year exemption, Lowe says, the qualifying period will be limited to the past 15 years of ownership. Further changes were also announced to give deceased estates and beneficiaries easier access to the concessions.