• News
  • 26 September 2018

Now more difficult to qualify for small business CGT concessions when selling shares or interests

When selling a business, it is always important to determine whether or not a seller can qualify for the small business CGT concessions to either exempt, reduce or defer a capital gain made on the sale.

When examining the small business CGT provisions to determine if a taxpayer would qualify for these concessions, there is an obstacle course of conditions that must be navigated, but if applied correctly, the concessions can deliver excellent results on the sale of a business.  The CGT concessions are the:

  1. 15-year exemption (i.e. exempt capital gain provided the business was owned for at least 15 years);
  2. retirement exemption (i.e. can contribute $500,000 to superannuation if under 55 years of age);
  3. 50% active asset reduction (i.e. automatic 50% discount); and/or
  4. replacement asset rollover (i.e. defer capital gain for 2 years automatically)

For a taxpayer to be entitled to the concessions, the taxpayer must meet certain basic conditions (e.g. a taxpayer must have a total turnover of less than $2 million and be carrying on a business in the current year or have total net assets of $6 million or less just before the CGT event).  In addition to meeting the basic conditions above and depending on which concession the taxpayer wants to claim, concession specific conditions will also have to be met.

If a taxpayer is selling business assets, the enquiry stops here – however, if the taxpayer is selling shares or an interest in either a company or a trust, additional conditions will have to be met:

  •  if an individual holds the shares/interests in a company/trust (i.e. object entity) that are to be sold, the individual taxpayer or his/her spouse must be a CGT concession stakeholder (i.e. individual or spouse must hold 20% or more of the voting and distributions rights in the company or trust); or
  • if a company or trust holds the shares/interests that are sold, all CGT concession stakeholders in the object entity must hold at least 90% of the shares/interests in the company/trust selling the shares/interests.

Recently, a Bill passed the Senate that will make it even more difficult (i.e. impose more conditions) on taxpayers to qualify for small business CGT concessions if shares in a company or interests in a trust are sold on or after 8 February 2018.  Treasury believes that these changes will stop schemes exploiting access to the small business CGT concessions (i.e. avoid concessions from being inappropriately applied when shares or interests in large businesses are sold).

The Bill imposes three additional conditions that have to be met when selling shares or an interest in companies or trusts (so in total there is now 4 conditions that will have to be satisfied when selling shares or interests).

According to these additional changes the concessions will only be available if (in addition to the conditions mentioned above):

  1. the taxpayer (i.e. the entity selling the share/interest) either satisfies the $6 million net asset value test or carries on a business just before the taxpayer sold the shares or interests;
  2. the object entity (i.e. the company or trust in which shares or interests are sold) is either a CGT small business entity (i.e. turnover less than $2 million and carrying on a business) or satisfies the $6 million net asset value test in the year of sale; and
  3. shares or interests in the object entity satisfy a modified active asset test.

As you can no doubt see, determining whether you can qualify for small business CGT concessions when you sell your business (either selling the business assets or the shares or an interest in a company or trust) is no simple task. 

Therefore, please speak to your Nexia adviser so that we can perform proper due diligence and help guide you through this process.

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