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Interaction between the Small Business CGT Concessions and Marriage Breakdowns

This article explains the interaction between the Small Business CGT Concessions and marriage breakdowns.

Particularly, an overview of the interaction, the modifications to the Active Asset Test and the small business 15-year exemption, and the circumstances in which a taxpayer may or may not want to choose for the modifications to apply.

Overview

When a marriage breaks down there would usually be a financial settlement involving the transfer of assets between the parties to the marriage, including transfers from their companies or trusts.  This would usually be done under an automatic capital gains tax roll-over.

In broad terms where the automatic capital gains tax roll-over applies, the transferor disregards any capital gain or loss on the transfer of the asset.

What happens for the transferee depends on whether the asset was a pre or post-CGT asset in the hands of the transferor.

If the asset was a pre-CGT asset in the hands of the transferor, then the transferee inherits the pre-CGT status for the asset.

However, if the asset was a post-CGT asset in the hands of the transferor, then the transferee inherits the transferor’s tax cost base in the asset.  In this circumstance, the transferee’s acquisition date for the asset is usually when the marriage breakdown financial settlement is executed.

There is an extension to this acquisition date for the purposes of determining whether a subsequent capital gain might qualify as a discount capital gain in respect of the minimum 12-month ownership requirement, but that extension doesn’t apply for the purposes of the Small Business CGT Concessions.

So, what happens if a taxpayer wants to apply the Small Business CGT Concessions to a sale of a post-CGT asset that they acquired under a marriage breakdown financial settlement with an automatic capital gains tax roll-over?

Well, the normal requirements for the Small Business CGT Concessions still need to be satisfied, but there are modifications for the Active Asset Test and the small business 15-year exemption.

The modifications are designed to assist the taxpayer to access the Small Business CGT Concessions where they otherwise might not be able to due to the post-CGT asset having an acquisition date set when the marriage breakdown financial settlement was executed.

Modifications

The modifications are a choice, and the taxpayer does not have to choose to apply them.  And in certain circumstances they may not want to choose to apply them.  This will be discussed later.

The modifications can be chosen to apply where the taxpayer acquired the asset under a marriage breakdown automatic capital gains tax roll-over.

If the modifications are chosen, then the taxpayer applies the Active Asset Test as if:

  1. The taxpayer had acquired the asset when the transferor acquired the asset;

  2. The asset had been an active asset of the taxpayers’ at all times when the asset was an active asset of the transferor; and

  3. The asset had not been an active asset of the taxpayers’ at all times when the asset was not an active asset of the transferor.

In addition, if the modifications are chosen, then the taxpayer applies the small business 15-year exemption as if the taxpayer had acquired the asset when the transferor acquired the asset.

The effect of these modifications are that the taxpayer inherits the transferor’s acquisition date and active asset history.

When to choose for the modifications to apply

The taxpayer may want to choose for the modifications to apply where:

  1. The taxpayer would fail the Active Asset Test but for the modifications; or

  2. The small business 15-year exemption would not be available but for the modifications and the modifications would not cause the taxpayer to fail the Active Asset Test.

However, the taxpayer may not want to choose for the modifications to apply where:

  1. The taxpayer would satisfy the Active Asset Test without the modifications and the small business 15-year exemption would be available without the modifications; or

  2. The taxpayer would satisfy the Active Asset Test without the modifications and the taxpayer does not want to access the small business 15-year exemption.

Disclaimer – The above is intended as commentary and general information only.  It should not be relied upon as taxation advice.  Formal taxation advice should be sought for particular transactions or on matters of interest arising from the above.

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