On 8 February 2018, Treasury released Draft Legislation to implement a backdated Div.152 ITAA 1997 Small Business CGT Integrity Measure. The proposed measure was announced (in broad terms only) in the May 2017 Federal Budget and will impact the application of the Small Business CGT Concessions in Div.152 ITAA 1997 to CGT Events (e.g. sales) regarding shares or trust interests (referred to as “units” throughout this document for ease of reference) which occur on or after 1 July 2017.
Application of the Div.152 ITAA 1997 Small Business CGT Concessions to shares or units has always been subject to existing additional eligibility requirements including:
While the above conditions will broadly continue to apply to share and unit CGT Events occurring from 1 July 2017, the Draft Legislation proposes to remove the existing conditions by repealing current s.152-10(2) ITAA 1997 and modify them by adding new and tightened eligibility criteria under proposed ss.152-10(2), (2A) and (2B) ITAA 1997.
As illustrated below, when applying the Small Business CGT Concessions to share or unit CGT Events from 1 July 2017, the following requirements must be satisfied:
The new restrictions may limit the ability for a company or unit trust/Object Entity to include the following assets in the top/active asset line of its 80% calculation (despite those assets falling within the bottom/total market value line of the calculation) as follows:
cash or financial instruments (e.g. bonds, debentures and some loans) will be excluded unless they are the object entity’s trading stock (or otherwise meet specific licensee or regulatory requirements regarding their issue and use in the relevant business);
shares or units held by the Object Entity, which are now excluded from the top/active asset line of the >80% calculation but remain within the bottom/total market value line; and
indirectly held active assets (or cash/financial instruments meeting the above requirements) which are indirectly owned by the Object Entity via >1 “later entity” (i.e. lower or subsidiary entities) are more likely to be excluded from the top/active asset line of the 80% calculation. Such indirectly held active assets will be excluded from the top/active asset line unless the later entity (which directly holds those assets) also satisfies modified versions of either the SBE CGT Test (i.e. <$2 Million aggregated business turnover) or the <$6 Million Net Asset Value Test, carries on business in its own right and has an appropriate individual(s) as CGT Concession Stakeholder.
and also satisfy pre-existing requirements to either be a CGT Concession Stakeholder (for individuals) or meet the 90% Test (for non-individuals) in relation to the Object Entity. Note that these requirements broadly replicate pre-existing requirements for share/unit CGT Events and continue to use the existing $6 Million Net Asset Value or <$2 Million Aggregated Turnover tests in unmodified form.
These Object Entity requirements are likely to be particularly problematic for share/unit sales (or other CGT Events) where the business may have ceased and/or the object entity owned business active assets used by a trading entity without carrying on business in its own right.
The new grouping rules for the modified <$6 Million Net Asset Value Test, <$2 Million SBE CGT Aggregated Turnover Test and <80% Market Value Test (regarding indirectly held active assets via the Object Entity’s Later/Lower entities) are complex, with full analysis beyond the scope of this brief Tax Astute Snapshot document. In broad terms, however, the new modified grouping rules will generally require connected entity status to be determined via a >20% control interest (replacing the usual >40%) and will generally apply only to controlled Later/Lower entities of the Object Entity (unlike the usual inclusion of controllers and commonly controlled entities for general purposes) – see D above.
Despite the Draft Legislation representing the first release of detailed information regarding the proposed Div.152 ITAA 1997 Small Business CGT integrity measures, the Draft Legislation proposes that the above measures will have backdated application to all share/unit CGT Events which have occurred since 1 July 2017.
In addition to details available at www.taxastute.com.au, Tax Astute clients receive more information and specific details, questions and answers underlying the brief snapshot summary above as a part of their:
©Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 2018
This training material snapshot summary is subject to copyright and may not be reproduced, reused or adapted in any manner, except in accordance with the Copyright Act 1968 (Cth) for bona fide study purposes, other than with the express written consent of Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust).
This material has been prepared with the objective of maximising accuracy and currency, but is provided for personal educational purposes only and must not be relied on as legal, financial or any other type of advice. Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) hereby excludes any and all liability arising, whether directly or indirectly, from the use of this training material snapshot summary and any information contained herein.