The Small Business Relief (SBR) concessions are a series of measures that can significantly reduce – or even eliminate – a capital gain arising on qualifying business assets.
If you satisfy the eligibility conditions, that is.
Uptick in ineligible claims
The ATO has revealed a noticeable trend of some businesses mistakenly claiming these concessions when they did not in fact satisfy all of the eligibility conditions. Many of the business owners may well have genuinely believed they were eligible. However, the generosity of the concessions is matched by the complexity of the eligibility conditions.
Some of those conditions have criteria that must be satisfied years ahead of a sale. It would be hugely disappointing if you missed out, knowing you might have been eligible if only those criteria had received some attention earlier.
It’s to be expected that eligibility for concessions of this nature would be tightly controlled. A number of eligibility conditions must be satisfied, and they should not be underestimated, with twists, turns and traps along the way.
The ATO has given the heads up that anyone who has claimed any of the SBR concessions in recent tax returns might receive a letter. It’s not a notification of an audit, but rather encouraging you to check that you met the eligibility conditions, and that you have documented support for that.
The SBR concessions
There are four SBR concessions:
- 15-Year Exemption
- 50% Reduction (not to be confused with the general 50% capital gain discount)
- Retirement Exemption
- Small Business Rollover
Before any of the concessions can even be considered, a series of eligibility conditions must be satisfied. If these are satisfied, only then can you move onto considering the above concessions. However, each concession except the 50% Reduction then have further conditions that must be satisfied in order to apply the particular concession.
The 15-year exemption fully exempts a capital gain. However, if you do not satisfy the further conditions for this particular concession, you can move onto the others. These remaining SBR concessions, which can be applied after the general 50% capital gain discount, can still reduce a capital gain to nil.
The concessions are available not only for business assets sold directly (eg, goodwill, property), but also for a sale of shares in a company, or units in a unit trust, that carries on a business. However, a sale of shares or units requires you to satisfy even more eligibility conditions.
Most of the eligibility conditions require satisfying certain criteria in the time before the sale transaction, whereas others require you to do certain things afterwards, and by certain deadlines.
Eligibility years in the making
For the eligibility conditions relating to before the sale, some need to be satisfied only at a single point in time – just before the sale. Accordingly, you can plan leading up to the sale to ensure they are satisfied. However, other eligibility conditions require satisfying certain criteria over a number of years before the sale. If you haven’t satisfied the criteria over that time, it’s too late just before the sale.
The key is to give attention to the eligibility criteria long before selling your business or a business asset.
The kinds of eligibility errors the ATO has noted from conducting reviews include:
Not satisfying the $6 million maximum net asset value test. This includes other entities and people grouped with the entity deriving the capital gain.
The asset sold was not an “active asset” for at least half the period owned.
Not satisfying the additional tests for a sale of shares or units.
Not taking into account all people/entities that are grouped for the above $6 million test. These can be included based on distributions of trust income or capital in the four years before the sale.
A company or unit trust having certain features in its equity structure that compromise eligibility (unless rectified before the sale).
As per to the left, but if seeking to apply the 15-year exemption, those features must be absent for 15 years before the sale (not necessarily continuous).
For the 15-year exemption, not making the required proportionate distributions of trust income or capital to the right people for 15 years before the sale (not necessarily continuous).
In many cases, the above concession-ruining errors can be avoided, provided eligibility for the SBR concessions is considered sufficiently in advance of a sale transaction. That usually means years in advance.
As noted above, the SBR concessions can be generous, but the rules are complex. Claiming any of the SBR concessions without a proper consideration of eligibility and documenting support that criteria have been met is extremely high risk. The purpose of giving these rules the attention they require is two-fold:
- Appropriately plan to satisfy all eligibility conditions ahead of a sale transaction
- Confirm that all eligibility conditions for claimed concessions are satisfied, and documenting support.
At Nexia, we have advised on the SBR concessions extensively since the first generation of these rules was enacted in the 1990s (the existing rules are the third generation). Over that time, the ATO has reviewed SBR concession claims for a number of our clients. A claimed concession has never been reversed.
The purpose of appropriately addressing the SBR eligibility conditions is to prevent money unnecessarily leaving your pocket, maximise the value extracted from selling your business or a business asset, and help you sleep well at night in the process.
Talk to your trusted Nexia advisor about ensuring you are in the best position to avail yourself of the SBR concessions, no matter how far in the future a sale might be.
Article by David Montani2021