Small Business Concessions

Improved Access to Small Business Capital Gains Tax Concessions

The Tax Laws Amendment (2009 Measures No. 2) Bill 2009 was introduced into Parliament on 19 March 2009. The Senate Economics Committee is due to report on 7 May 2009.  It includes a number of measures including changes to the small business capital gains tax concessions.

Whilst the Tax Laws Amendment (Small Business) Act 2007 introduced a single definition of a small business entity to assist in simplifying the access to the small business concessions, there were some taxpayers that remained ineligible.

This Bill has been introduced to increase access to those taxpayers. The main amendments contained within the Bill are to apply to CGT events for the 2007-08 and later income years to align with the date of effect of the small business entity regime amendments.

Entities holding passive assets – owners of passively held assets which were used in the business of an affiliate or connected entity could not access the concession through the small business entity test as they did not typically meet the requirement of carrying on a business. This leaves the taxpayer to determine their eligibility via the maximum net asset value test. These taxpayers will now be able to access the concessions.

Partners in a partnership – in some instances a partner owned an asset that was “used in the partnership” as opposed to a fractional interest in “an asset of the partnership”. This situation did not qualify for the small business entity test and left the partner to determine their eligibility via the maximum net asset value test. These taxpayers will now be able to access the concessions.

Spouses or children taken to be affiliates – currently a CGT asset is not considered active where the taxpayer’s spouse owns an entity that uses the CGT asset in its business, unless that business is an affiliate of the taxpayer which can be difficult to establish.  The spouse or child under 18 will now be considered affiliates in a wider range of circumstances.

Further amendments to refine and clarify aspects of the existing provisions include:

• Net Asset Test – where the value of interests in entities connected with taxpayer are disregarded   to avoid double counting, this disadvantages some taxpayers with liabilities indirectly related to assets whose gross value have been included. These liabilities will now be included in determining net asset values.
• Active Asset (Main Use to Derive Rent) – currently a taxpayer may predominantly derive rent from another who is not an affiliate nor connected whilst a minor business use could qualify the asset for the concessions. This ability is to be removed by amending the legislation to look at all uses of the asset.
• Joint tenants and testamentary trusts – access is to be extended to assets acquired on the death of a joint tenants and those that devolve to trustee of a trust established by will of an individual where the deceased would have been able to access the concessions
• Retirement concession for events J5 and J6 – where a capital gain is made as a result of the taxpayer not purchasing a replacement asset, nor acquiring one for a sufficient cost, taxpayers will still be able to access the retirement concessions by making unnecessary the basic conditions for the small business retirement exemption.
• Retirement exemption payments to CGT concession stakeholders through interposed entities will  now be entitled to the concessions.
• Partners and Small Business Entities – a partner in a partnership will not be a small business entity in their capacity as a partner.

Taxpayers that become eligible to make a choice under Division 152 will receive an extended time period in which to make the choice to the later of:

•    The day the taxpayer lodges their tax return for the income year in which the CGT event occurred;
•    12 months after the day on which the Bill receives royal assent; or
•    A day allowed by the Commissioner.

Whilst the amendments will not impact on a majority of small business taxpayers, they will nonetheless have a significant impact on those that can now access the small business concessions for CGT events in the 2007-08 and later income years.

For more information please contact your Moore Stephens relationship partner.