Small business CGT concessions — the basic rules
Division 152 of the ITAA 1997 provides four CGT concessions for taxpayers who have realised capital gains on the disposal of a CGT asset used in carrying on a business. To be eligible, certain basic conditions and additional conditions for eligibility must be satisfied
Broadly, the basic conditions in Subdiv 152-A require:
- the taxpayer to either:
- be a CGT small business entity (CGT SBE) — which requires the taxpayer to satisfy the $2 million turnover test set out in s. 328-110 as modified by s. 152-10(1AA); or
- satisfy the maximum net asset value (MNAV) test set out in 152-15; and
- the CGT asset to satisfy the active asset test in 152-35.
The concessions are the:
- Small business 15-year exemption (Subdiv 152-B) — a capital gain is disregarded if a CGT asset has been continuously owned for a 15 year period just prior to disposal, and the individual (or a ‘significant individual’ in the case of a company or trust) is age 55 or more (or permanently incapacitated) at the time of the CGT event and the event happens in connection with retirement.
- Small business 50 per cent reduction (Subdiv 152-C) — an optional 50 per cent reduction of the amount of a capital gain. The reduction is in addition to any reduction for discount capital gains, and may be used in combination with the small business retirement exemption or small business roll-over.
- Small business retirement exemption (Subdiv 152-D) — a capital gain is disregarded if the capital proceeds from the CGT event are used in connection with retirement. A lifetime limit of $500,000 applies.
- Small business roll-over (Subdiv 152-E) — a capital gain is deferred to the extent that the taxpayer incurs expenditure on a replacement asset, or improves an existing asset, within a certain time period.
Further specific eligibility requirements may apply in respect of the concessions.
The CGT concessions:
- do not operate to reduce or deny a capital loss; and
- are not applicable to depreciable assets (a gain or loss on a depreciating asset is calculated under the Div 40 balancing adjustment rules).
What attracts the ATO’s attention
Given the generous nature of these concession they are always a focus point of the ATO. However, recently the ATO announced that they are increasing their attention to taxpayers who have claimed the concessions in recent tax returns. They are sending tax agents letters requesting them to check client claims and to ensure that the basic eligibility conditions were satisfied. The ATO also requests tax agents check they have records to substantiate any client claims.
Situations that attract the ATO attention include:
- entities that fail the small business entity test (for example, fail to carry on a business or have an aggregated turnover greater than $2 million);
- entities that fail the $6 million MNAV test — noting that net assets include not only assets of the entity, but also connected entities and affiliates;
- the asset disposed is not an active asset;
- entities that do not meet the additional conditions where the CGT asset is a share or trust interest;
- entities that fail to correctly identify significant individuals and CGT concession stakeholders;
- entities that restructure for the primary purpose of enabling access to small business CGT concessions;
- entities that claim the small business rollover, but do not report a CGT event J5 at the end of the replacement asset period when they fail to acquire a replacement asset;
- entities that do not meet the additional conditions applicable to the type of small business CGT concession claimed such as exceeding the small business CGT retirement exemption limit of $500,000;
- entities that fail to correctly report or apply the 15-year exemption.
What to do if you identify a mistake
The ATO is encouraging tax agents to check that all clients’ recent or planned future small business CGT concession claims are accurate. Contact the ATO if an error is identified.
The ATO also advises that to ensure small business CGT concession eligibility and to avoid administrative time to correct a mistake a tax agent can:
- reach out for an early engagement discussion to seek advice on the client’s small business complex transaction;
- seek a pre-lodgment compliance agreement for the client’s commercial deals and restructure events;
- apply for a private ruling to attain certainty on the client’s application of small business CGT concessions.
Further info and training
The small business CGT concessions are arguably some of the most generous provisions in the ITAA. The concessions are targeted to small business and consist of:
- the small business 15-year exemption;
- the small business 50 per cent reduction;
- the small business retirement exemption; and
- the small business roll-over.
Depending on which concession (or concessions) applies, a taxpayer can defer, reduce or even disregard a capital gain.
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