A number of amendments have been made to the small business capital gains tax (CGT) concessions to reduce the compliance costs for small business as well as increase the availability of the concessions.
Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) contains four small business CGT concessions that are available for eligible small businesses:
- the 15-year exemption
- the retirement exemption
- the active assets 50% reduction
- the small business roll-over.
There were two rounds of changes for 2006-07. The first round became law in April 2007. The second round changes became law in June 2009 and apply retrospectively for 2006-07.
The first round of amendments improve the operation of the small business CGT concessions by making changes to:
- the maximum net asset value test
- the active asset test
- the 15-year exemption
- the retirement exemption
- the small business roll-over, and
- how the concessions apply to
- partners in a partnership, and
- deceased estates.
To improve access to the concessions, the controlling individual 50% test has been replaced with a new significant individual 20% test. This test can be satisfied directly or indirectly through one or more interposed entities.
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These amendments apply to CGT events that happen in the 2006-07 and later income years.
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New law
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Old law
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Controlling/significant individual test
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Significant individual 20% test that can be satisfied either directly or indirectly through one or more interposed entities.
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Controlling individual 50% test that could only be satisfied directly.
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Maximum net asset value test
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The maximum net asset value test takes into account a negative net asset value of a connected entity in looking at the net assets of an entity.
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The maximum net asset value test did not allow the possibility of a negative net asset value for an entity.
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The maximum net asset value test takes into account the assets and related liabilities of an entity and provisions for annual leave, long-service leave, unearned income and tax liabilities.
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The maximum net asset value test only took into account the assets and related liabilities of an entity.
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The maximum net asset value test in relation to a partnership only applies to the individual partners in a partnership.
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The maximum net asset value test in relation to a partnership applied to a partnership as a whole.
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The assets of an individual, for the purposes of the maximum net asset value test, include only the proportion of a dwelling that was used for income producing purposes.
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The assets of an individual, for the purposes of the maximum net asset value test, include the entire value of a dwelling that had an income producing use.
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Active asset test
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Active asset test requires the asset to be active for the lesser of 7½ years or half of the period of ownership. The asset does not need to be an active asset just before the CGT event.
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Active asset test required the asset to be active for the lesser of half the period of ownership or 7½ of the last 15 years. It also required the asset to be active just before the CGT event.
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An 80% look through test is applied to the active assets of the company or trust to determine whether shares in a company or interests in a trust qualify as active assets. Cash and financial instruments inherently connected with the business are counted towards the 80% requirement.
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Certain cash and financial instruments inherently connected with the business were not counted towards the 80% requirement.
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The 80% look through test does not need to be tested in circumstances where it is reasonable to conclude that the 80% test has been passed.
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Theoretically, the 80% look through test needed to be monitored on a continuous basis.
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The 80% look through test is not failed because of a breach of the threshold that is only temporary in nature.
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The 80% look through test could be failed for a temporary breach - this could result in a capital gain being realised.
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Additional requirement for shares or trust interests
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In addition to the existing test, an alternative to the direct ownership requirement is introduced.
The alternative requirement is the 90% test. An entity satisfies the test if there are CGT concession stakeholders in the object company or trust, and the CGT concession stakeholders have a small business participation percentage in the entity disposing of the shares or interests, of at least 90%.
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The entity that owns the shares or trust interests must be a CGT concession stakeholder in the company or trust (the object company or trust).
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15-year exemption
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The 15-year exemption requires a significant individual of a company or trust only for any period or periods totalling 15 years during the period of ownership.
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The 15-year exemption required a controlling individual of a company or trust for the entire period of ownership.
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Retirement exemption
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A payment of an amount exempted under the retirement exemption will be either deemed to be an eligible termination payment or to have been paid in respect of employment.
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A payment of an amount exempted under the retirement exemption was required to be an eligible termination payment.
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The retirement exemption also applies to gifts of property. As there are no capital proceeds from the event the market value substitution rule applies to determine the amount of deemed capital proceeds.
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The retirement exemption did not apply to gifting of property.
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Small business roll-over
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A taxpayer can choose to roll-over all or part of a capital gain.
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A taxpayer could only choose to roll-over all of a capital gain.
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Replacement assets can be newly acquired assets or improvements to assets that the taxpayer already owns.
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A replacement asset could only be a newly acquired asset.
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A taxpayer can choose to roll-over a capital gain before acquiring a replacement asset or making a capital improvement (a replacement asset).
CGT event J5 will happen if no replacement assets are held at the end of two years.
CGT event J6 will happen if insufficient replacement assets are held at the end of two years.
See also the June 2009 amendments.
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A taxpayer would have to return a capital gain if they had not yet acquired a replacement asset, and could seek an amended assessment following acquisition of a replacement asset.
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Deceased estates
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The legal personal representative of the deceased or a beneficiary of the deceased's estate can access the concessions to the same extent that the deceased could have used them just prior to death, on assets disposed of within two years of death.
See also the June 2009 amendments.
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No equivalent.
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What are the June 2009 changes?
The government made minor changes to increase access to the concessions and improve the operation of the concessions. These changes became law in June 2009 and apply retrospectively for 2006-07.
Basic conditions - joint tenants and testamentary trustees
The changes provide access to the concessions for joint tenants and trustees and beneficiaries of testamentary trusts where a gain arises on an asset within two years of an individual's death, and:
- that asset was owned by the deceased, and
- the deceased would have been eligible for the concessions on that asset.
Retirement exemption - CGT events J5 and J6
This change makes the retirement exemption available for gains that arise from CGT events J5 and J6. These events occur when a taxpayer fails to meet the replacement asset conditions for the small business roll-over concession by the end of the replacement asset period.
Previously, taxpayers were ineligible to use the retirement exemption for these gains because the basic conditions for the concessions could not be satisfied. It was always intended that the retirement exemption be available for capital gains made from these CGT events.
The amendments remove the requirement for J5 and J6 events to meet the basic conditions in applying the retirement exemption.
Choosing the concessions
The taxpayer has until the later of:
- the day the entity lodges its income tax return for the income year in which the relevant CGT event happened, and
- 23 June 2010, and
- a later day allowed by the Commissioner.
The extension of time to make a choice applies to CGT events happening before June 2009.
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For more detailed information on a particular change refer to:
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Last Modified: Thursday, 28 June 2012