Small Business CGT Integrity Measure
from 1 July 2017
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.
- The proposed Small Business CGT changes explained in this document apply solely to CGT Events regarding shares and units in a company or trust. If instead, business assets (e.g. goodwill, business premises and similar) are subject to a CGT Event, the existing Div.152 ITAA 1997 Small Business CGT Concession rules will continue to apply unchanged before and after 1 July 2017.
- While this document often refers to shares or units being “sold” for ease of reference, it is important to note that a variety of additional CGT Events, including but not limited to CGT Event C2 when shares/units are cancelled or otherwise end, may also be relevant (see existing s.104-5 ITAA 1997 for a list of CGT Events).
- The term “Object Entity” in this document refers to a company or trust in which shares or units are being sold or otherwise subject to a CGT Event.
- The term “Later Entity” refers to a subsidiary/lower level entity of an Object Entity which satisfies specified eligibility requirements of various new modified tests explained below.
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:
- CGT Concession Stakeholder status (i.e. an individual holding a direct or indirect >20% interest and/or their spouse with a >0% interest in the Object Entity/the company or unit trust being sold) for an individual seller/capital gain maker;
- a >90% test being passed by a non-individual seller/capital gain maker (broadly a >90% interest must be held in the seller/capital gain making entity by individual CGT Concession Stakeholders of the Object Entity– see dot point above); and
- a requirement for >80% of the market value of the Object Entity (i.e. the company or unit trust being sold) to comprise Div.152 ITAA 1997 Active Assets (with special rules for some business-related cash and financial instruments (e.g. bonds, debentures and loans) and shares/units held in lower-level/subsidiaries).
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:
- A modified >80% active asset test (see A) must be satisfied by the Object Entity (i.e. the company or unit trust in which shares/units are sold) under proposed new ss.152-10(2)(a), (2A) and (2B) ITAA The new modified test is complex in nature (with full analysis beyond the scope of this brief Tax Astute Snapshot document) but it broadly adds restrictions to some assets which previously counted as Div.152 ITAA 1997 Active Assets (and which could therefore increase the chance of a >80% result).
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.
- The seller/capital gain maker (see B) must, just before the CGT Event, either:
carry on business in their own right; or
pass the <$6 Million Net Asset Value Test,
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.
- The Object Entity (see C) must, just before the CGT Event:
carry on business in its own right; and
pass the new modified versions of either the <$2 Million CGT aggregated/business turnover or <$6 Million net asset value tests.
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.
WANT MORE DETAILS?
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 Training Session;
- Tax Astute Final Reference Notes; and
- Tax Astute Detailed Multimedia Recording.
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