Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) contains four small business capital gains tax (CGT) concessions that are available for eligible small businesses:
- the 15-year exemption
- the retirement exemption
- the active assets 50% reduction, and
- the small business roll-over.
These concessions may apply to CGT events (for example, the disposal of a CGT asset) that happened after 11.45am, by legal time in the Australian Capital Territory, on 21 September 1999.
A number of amendments have been made to the small business CGT concessions to reduce the compliance costs for small business as well as increase the availability of the concessions.
These amendments increase access to the small business CGT concessions by way of the $2 million aggregated turnover test.
Changes have also been made to:
- the maximum net asset value test
- the active asset test
- the 15-year exemption
- the retirement exemption
- the small business rollover
- how the concessions apply to
- partners in a partnership
- deceased estates.
The controlling individual 50% test has been replaced with a significant individual 20% test.
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For further information on the changes, see:
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To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'.
Each concession also has further requirements that you must satisfy for the concession to apply (except for the small business 50% active asset reduction which applies if the basic conditions are satisfied).
Follow the steps below to determine whether you satisfy the basic conditions.
Step 1
You must first satisfy at least one of the following conditions:
- you are a small business entity
- you do not carry on business (other than as a partner) but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (passively-held assets)
- you are a partner in a partnership that is a small business entity and the asset is one of the following
- an interest in a CGT asset of the partnership (partnership assets)
- a CGT asset you own (that is not an interest in a partnership asset) is used in the business of the partnership (partner's assets), or
- you satisfy the maximum net asset value test.
Step 2
In addition to satisfying one of the conditions outlined at step 1, the asset must satisfy the active asset test.
Step 3
This step only applies if the CGT asset is a share in a company or an interest in a trust. Where this is the case, one of these additional basic conditions must be satisfied just before the CGT event:
- you must be a CGT concession stakeholder in the company or trust, or
- CGT concession stakeholders in the company or trust together have a small business participation percentage in the interposed entity of at least 90% (the 90% test).
CGT concession stakeholder
An individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust that is greater than zero. This participation percentage can be held directly or indirectly through one or more interposed entities. The percentages are worked out in the same way as for the significant individual test.
Significant individual
An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. The 20% can be made up of direct and indirect percentages.
An entity's direct small business participation percentage in a company is the percentage of:
- voting power that the entity is entitled to exercise
- any dividend payment that the entity is entitled to receive, or
- any capital distribution that the entity is entitled to receive.
If an entity has different percentages in a company, their participation percentage is the smaller or smallest percentage. The same applies for a trust.
Example 1
Bill has shares that entitle him to 30% of any dividends and capital distributions of Bean Co. The shares do not carry any voting rights.
Bill's direct small business participation percentage in Bean Co is 0%.
An entity's indirect small business participation percentage in a company or trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity, and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.
For a trust, where entities have entitlements to all the income and capital of the trust, an entity's direct small business participation percentage is the lower percentage of the income and capital of the trust that the entity is beneficially entitled to receive.
Where entities do not have entitlements to all the income and capital of a trust, and the trust makes a distribution of income or capital, an entity's direct small business participation percentage in the trust is the percentage of:
- distributions of income that the entity is beneficially entitled to during the income year, or
- distributions of capital that the entity is beneficially entitled to during the income year.
If an entity has an entitlement to both the income and capital of the trust, than the entity's direct small business participation percentage is the smaller percentage of the two.
If the trust did not make a distribution of income or capital during the income year it will not have a significant individual during that income year.
If an entity has different percentages in a company, their participation percentage is the smaller or smallest percentage. The same applies for a trust.
Example 2
Discretionary Trust owns 100% of the shares in Operating Company; therefore Discretionary Trust has a 100% direct interest (and no indirect interest) in Operating Company.
Jennifer receives 80% of the distributions from Discretionary Trust; therefore she has a direct participation percentage of 80% in Discretionary Trust.
To find Jennifer's participation percentage in Operating Company, multiply together Jennifer's direct participation percentage in Discretionary Trust and Discretionary Trust's total participation percentage in Operating Company.
Jennifer has an 80% participation percentage in Operating Company and is therefore a significant individual of Operating Company.
Bill receives 15% of the distributions from Discretionary Trust; therefore he has a direct participation percentage of 15% in Discretionary Trust.
To find Bill's participation percentage in Operating Company, multiply together Bill's direct participation percentage in Discretionary Trust and Discretionary Trust's total participation percentage in Operating Company.
Bill has a 15% participation percentage in Operating Company and is therefore not a significant individual of Operating Company.
(As a spouse of a significant individual with a participation percentage greater than zero in the entity, Bill will be a CGT concession stakeholder).
Nicky receives 5% of the distributions from Discretionary Trust; therefore she has a direct participation percentage of 5% in Discretionary Trust.
To find Nicky's participation percentage in Operating Company, multiply together Nicky's direct participation percentage in Discretionary Trust and Discretionary Trust's total participation percentage in Operating Company.
Nicky has a 5% participation percentage in Operating Company and is therefore not a significant individual of Operating Company. (Nicky is not a CGT concession stakeholder).
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An indirect interest can be held through one or more interposed entities.
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90% test
This test only applies if there is an interposed entity between the CGT concession stakeholder and the company or trust in which the shares or interests are held. The interposed entity satisfies the test if 90% of the participation percentages in that entity are held by CGT concessions stakeholders of the company or trust in which the shares or interests are held.
Example 3
Jennifer, a significant individual and a CGT concession stakeholder of Operating Company, has an 80% small business participation percentage in Discretionary Trust.
Bill, a CGT concession stakeholder of Operating Company, has a 15% small business participation percentage in Discretionary Trust.
Nicky, who is not a CGT concession stakeholder of Operating Company, has a 5% small business participation percentage in Discretionary Trust.
At least 90% of the participation percentages in the Discretionary Trust are held by CGT concession stakeholders of Operating Company. Therefore Discretionary Trust satisfies the ownership requirement if it sells its shares in Operating Company and can access the concessions on those shares, provided that the other conditions are met.
See diagram in example 2.
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As with the significant individual test, the participation percentage can be held directly or indirectly through multiple interposed entities.
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For further information on the changes, see:
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Last Modified: Thursday, 28 June 2012