Small Business CGT concessions integrity measures

The Small Business CGT concessions integrity measures received royal assent on 3 October 2018 after a welcome amendment from the Senate in which the start date was changed from 1 July 2017 to 8 February 2018.

Under the integrity measures, where the CGT asset is a share in a company or an interest in a trust (with that company or trust being defined as the “object entity”), then the following additional basic conditions must be satisfied:

1. An additional modified Active Asset Test;
2. An additional “carrying on a business” test in limited circumstances;
3. An additional modified CGT Small Business Entity test or modified Maximum Net Asset Value test; and
4. An additional CGT concession stakeholder test.

These are discussed below.

Additional modified Active Asset Test

In relation to the additional modified Active Asset Test, the CGT asset would be required to satisfy the Active Asset Test if the following assumptions were made:

• Financial instruments and cash inherently connected with a relevant business are not taken into account for the benefit of the Active Asset Test if they were acquired for a purpose that included assisting the CGT asset to satisfy the Active Asset Test; and
• If the object entity holds any direct or indirect interests in companies or trusts (with those companies or trusts being defined as a “later entity”):
  • those interests themselves are not taken into account for the purpose of the Active Asset Test;
  • rather, a proportion of each later entity’s underlying assets are taken to be assets held by the object entity directly;
  • that proportion equals the object entity’s small business participation percentage in the object entity;
  • however, the only later entity underlying assets which can be taken to be active assets (and hence benefit the Active Asset Test) are those which satisfy all of the following requirements:
    • the later entity underlying assets would otherwise qualify as active assets of the later entity (including after the limitation for financial instruments and cash mentioned above);
    • the taxpayer would either have a small business participation percentage in the later entity of at least 20% or be a CGT concession stakeholder in the later entity; and
    • the later entity would either be a CGT Small Business Entity at the relevant time or would satisfy the Maximum Net Asset Value test at the relevant time if the following assumptions were made:
      • the only CGT assets or annual turnovers considered were those of the later entity, the object entity, each affiliate of the object entity and each entity controlled by the object entity (based on the concept of control used when identifying connected entities);
      • when identifying controlled entities using the control percentage test, the control percentage required were reduced from 40% to 20%; and
      • any determination previously made by the Commissioner which determined that one entity does not control another entity were taken not to be in force.

Additional “carrying on a business” test

In relation to the additional “carrying on a business” test, if the taxpayer does not otherwise satisfy the Maximum Net Asset Value test the taxpayer would be required to be carrying on a business just before the CGT event.

Additional modified CGT Small Business Entity test or modified Maximum Net Asset Value test

In relation to the additional modified CGT Small Business Entity test or modified Maximum Net Asset Value test, the object entity would be required to either be a CGT Small Business Entity at the relevant time or would satisfy the Maximum Net Asset Value test at the relevant time if the following assumptions were made:

• the only CGT assets or annual turnovers considered were those of the object entity, each affiliate of the object entity and each entity controlled by the object entity (based on the concept of control used when identifying connected entities);
• when identifying controlled entities using the control percentage test, the control percentage required were reduced from 40% to 20%; and
• any determination previously made by the Commissioner which determined that one entity does not control another entity were taken not to be in force.

Additional CGT concession stakeholder test

In relation to the additional CGT concession stakeholder test, either the taxpayer must be a CGT concession stakeholder in the object entity or CGT concession stakeholders in the object entity must together have a small business participation percentage in the taxpayer of at least 90%.