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This article is primarily directed towards business owners that might feel hope that they may be able to benefit from the Small Business 50% Reduction with the proposed increase to the threshold for the CGT Small Business Entity Test (the “Test”). But it’s of interest to their advisers too.
It’s for businesses with a turnover of between $2,000,000 and $10,000,000.
Well maybe you can benefit, and maybe you can’t. And even if you can, it may not be as good as you first thought.
For background, here is the article on the proposed changes -> https://www.sbcgt.com.au/news/proposed-changes-cgt-small-business-entity-test
There are two key issues I want to touch on.
Firstly, can you access the Test.
Secondly, so what if you can.
Can I access the Test?
Details of the Test (based on the current $2,000,000 turnover test) can be found here -> https://www.sbcgt.com.au/solutions/accountants/cgt-small-business-entity-test
What I want to bring to your attention is that, even though you might own a business with a turnover of less than $10,000,000, you might not even be able to access the Test in the first place.
A specific case where this might apply is if:
- you are selling shares in a company or units in a unit trust (the “Sale Entity”);
- where the Sale Entity carries on a business with a turnover of less than $10,000,000; and
- you are an individual or trust that doesn’t carry on business in your own right.
In that case, you can’t access the Test. This is because:
- you yourself do not carry on a business with an turnover of less than $10,000,000; and
- the Sale Entity doesn’t carry on a business in relation to the shares or units in the Sale Entity.
The Sale Entity doesn’t carry on a business in relation to the shares or units in the Sale Entity because the shares or units are not assets that are used by, or inherently connected with, the business carried on by the Sale Entity. Rather, they are a bundle of rights in the Sale Entity based on constituent documents and legislation.
I didn’t talk about a situation where you are a company shareholder or unitholder that is selling shares or units in a Sale Entity. Company shareholders and unitholders might be able to obtain a different outcome in that there might be a rebuttable presumption that a company shareholder or unitholder carries on a business, even if its activities consist of passive investing. This is different to individual or trust shareholders or unitholders.
So what if I can access the Test?
That’s great. But it may not be as good as you first thought.
The Small Business 50% Reduction can reduce your capital gain by 50%. Details of the Small Business 50% Reduction can be found here -> https://www.sbcgt.com.au/solutions/accountants/small-business-50-reduction
Companies and Unit Trusts
What I want to bring to your attention relates to companies or unit trusts that make the capital gain.
If you are a company or unit trust, and you’ve just applied the Small Business 50% Reduction, then you now have an untaxed profit that might be waiting to be distributed.
For companies, you could distribute that out as a dividend, generally unfranked, which might effectively reverse the benefit of the Small Business 50% Reduction - not great. Or, if practicable, you might be able to liquidate the company and distribute it out as a capital amount, triggering CGT event G1 (capital payment for shares) or CGT event C2 (cancellation, surrender and similar endings) – possibly better, but less so with the proposed removal of the general discount for discount capital gains.
For unit trusts, the amount might be distributed at 30 June, triggering CGT event E4 (capital payment for trust interest), also effectively reversing the benefit of the Small Business 50% Reduction – and also negatively impacted by the proposed removal of the general discount for discount capital gains.
In either case, separate consideration should be given as to whether the Small Business CGT Concessions might be able to apply to those capital gains from CGT events G1, C2 or E4.
Individuals and Discretionary Trusts
Individuals that make the capital gain don’t have this problem. Untaxed profits don’t have to be distributed from companies or unit trusts.
Discretionary trusts that make the capital gain similarly don’t have this problem, unless they mess up their distributions. Distributions can be made to individual beneficiaries as opposed to companies or unit trusts.
Separate consideration would be required in relation to the proposed minimum 30% tax on discretionary trust distributions.
We will keep you updated as things progress.