Improving the integrity of the small business CGT concessions

Public consultation closed on 28 February 2018 on exposure draft legislation which is intended to implement the 2017 Budget announcement to improve the integrity of the small business capital gains tax (CGT) concessions.

The amendments include additional basic conditions that must be satisfied for a taxpayer to apply the small business CGT concessions to a capital gain arising in relation to a share in a company or an interest in a trust (the object entity).

Broadly, the proposed amendments require that where the relevant CGT asset is a share in a company or an interest in a trust (unit), each of the additional following conditions must be satisfied:

  • if the taxpayer does not satisfy the maximum net asset value test (currently $6 million), the relevant CGT small business entity must have carried on a business just prior to the CGT event;
  • the object entity must have carried on a business just prior to the CGT event; 
  • the object entity must either be a CGT small business entity or satisfy the maximum net asset value test (applying a modified rule about when entities are “connected with” other entities); and
  • the share or interest must satisfy a modified active asset test that looks through shares and interests in trusts to the activities and assets of the underlying entities.

The modified rule regarding connected entities (to be included in the maximum net asset value test) will lower the controlling interest threshold from 40% or more to 20% or more. This change will result in more entities being connected, increasing the pool of entities and therefore assets to be considered in calculating the MNAV test for the purposes of ownership interests in companies and trusts. This will in turn make it more difficult for the MNAV test to be satisfied.

If implemented in their proposed form, the changes will apply to taxpayers that have sold shares in companies or interests in trusts since 1 July 2017 and will significantly reduce access to the small business CGT concessions for taxpayers disposing of their ownership interest in companies and trusts.

Taxpayers who are seeking to apply the small business CGT concessions in relation to the sale of their interests in companies or trusts since 1 July 2017 should therefore seek appropriate advice to confirm their entitlement to the concessions.