2012
Seminar Series
Taxpayers AUSTRALIA INC
SMALL BUSINESS CGT CONCESSIONS
Presented by Roger Timms
Head of Tax & Superannuation
Table of contents
August 2012
Melbourne: Tuesday 28 August 2012
Sydney: Thursday 30 August 2012
Brisbane: Thursday 23 August 2012
Tel: 1300 657 572
Fax: (03) 8851 4588
Email: info@taxpayer.com.au
www.taxpayer.com.au/seminars
Small business and CGT Seminars
CONTENTS
Small Business CGT Concessions ........................................................................................................1
Overview . ............................................................................................................................................1
Introduction .........................................................................................................................................1
Background................................................................................................................................2
The concessions..........................................................................................................2
Basic conditions .........................................................................................................4
Additional basic conditions ........................................................................................4
CGT Event D1..............................................................................................................4
BasiC ConditionS for Relief . .................................................................................................................6
Condition 1 – CGT event ...........................................................................................................6
Condition 2 – Capital gain . .......................................................................................................6
Condition 3 – Maximum net assets or small business entity . ..................................................7
(i) Small business entity (SBE) ....................................................................................7
(ii) Maximum net asset value test ..............................................................................7
(iii) Partnership test . ..................................................................................................7
(iv) Section 152-10(1A) – Expanded SBE test..............................................................8
Condition 4 – Active asset test ...............................................................................................10
Additional basic condition – CGT concession stakeholder test . .............................................12
Modified condition – CGT event D1 . ......................................................................................12
Small Business Entity (SBE).................................................................................................................13
Meaning of SBE.........................................................................................................13
Carrying on a business..............................................................................................13
$2 Million aggregated turnover test.........................................................................14
Whose turnover is included?....................................................................................14
What is turnover?.....................................................................................................14
Maximum Net Asset Value Test..........................................................................................................16
Meaning of net value of CGT assets........................................................................................16
Market value of assets..............................................................................................17
Liabilities...................................................................................................................17
Indirect liabilities.....................................................................................................................18
What assets and liabilities are included..................................................................................19
What assets and liabilities are excluded..................................................................................20
Excluded assets – Individuals....................................................................................21
Connected entities..............................................................................................................................24
Basic rule.................................................................................................................................24
Connected with – Direct control of a company........................................................25
Connected Entity Test...............................................................................................26
Connected with – Direct control of a non-discretionary trust..................................26
Connected with – Direct control of a discretionary trust..........................................27
Influence the trustee test.........................................................................................27
The distribution test..................................................................................................27
Connected with – Direct control of a partnership ...................................................28
Connected with – Indirect control of an entity ........................................................29
Controllers in a loss year...........................................................................................30
Connected entities – Complying superannuation fund............................................31
Meaning of affiliate.............................................................................................................................32
Case Law33
Facts..........................................................................................................................33
Contents
Conclusion................................................................................................................33
Extension of the definition of affiliate.....................................................................................33
Original position........................................................................................................33
From 1 July 2007.......................................................................................................33
Current rule...............................................................................................................34
Transitional rules.....................................................................................................................35
Active Asset Test.................................................................................................................................37
What is an active asset?..........................................................................................................37
Assets excluded from being active assets................................................................................38
Main use of asset......................................................................................................38
Derivation of passive income....................................................................................40
Main use to derive rent............................................................................................40
AAT Decision: What is rent?....................................................................................................42
Tingari Village North Pty Ltd v FCT (2010) AATA 233.................................................42
Key legislation ..........................................................................................................43
Analysis.....................................................................................................................43
Observations regarding the Tingari Village decision.................................................43
Company shares and trust interests – 80% test......................................................................45
Significant Individual Test and CGT Concession Stakeholder..............................................................47
CGT concession stakeholder....................................................................................................47
Significant individual test.........................................................................................................47
Small business participation percentage (SBPP)......................................................................47
Direct SBPP...............................................................................................................48
Indirect SBPP.............................................................................................................50
CGT concession stakeholders – The 90% test..........................................................................51
Small Business 15 Year Exemption......................................................................................................53
Conditions to be satisfied........................................................................................................53
Individuals.................................................................................................................53
Companies and trusts...............................................................................................53
In connection with retirement..................................................................................54
Permanent incapacity..............................................................................................................54
Continuity of ownership..........................................................................................................55
Applying the exemption – The consequences.........................................................................55
Application to pre-CGT assets...................................................................................55
Application where ordinary income derived . ..........................................................55
Payments to CGT concession stakeholders...............................................................56
Payment through interposed entities......................................................................................57
Making payments....................................................................................................................58
Small Business 50% Active Asset Reduction.......................................................................................59
Conditions to be satisfied........................................................................................................59
Exclusions................................................................................................................................59
Application of the 50% reduction............................................................................................59
Rules for beneficiaries...............................................................................................59
Choosing not to apply the reduction.......................................................................................60
Trustees: The 50% asset reduction..........................................................................................61
Small Business Retirement Exemption...............................................................................................62
Eight CGT Concession Stakeholders.........................................................................................62
© Taxpayers Australia Inc | August 2012: Small business CGT concessons | III
Contents
Conditions to be satisfied........................................................................................................62
Individuals ................................................................................................................62
Company or Trust......................................................................................................63
Applying the retirement exemption........................................................................................64
Actual capital proceeds.............................................................................................64
Proceeds received in instalments.............................................................................64
Payments to CGT concession stakeholders...............................................................64
Transfer of real property...........................................................................................64
Interposed entities....................................................................................................65
Capital gains from CGT Event J2, J5, J6.....................................................................65
Division 152 concessions and superannuation contributions.................................................66
CGT Small Business Roll-Over.............................................................................................................67
Replacement asset period.......................................................................................................67
Replacement assets.................................................................................................................67
Roll-over conditions.................................................................................................................67
CGT Event J5..............................................................................................................68
Consequences of CGT Event J5 ................................................................................68
CGT Event J6..............................................................................................................69
Consequences of CGT Event J6.................................................................................69
CGT Event J2..............................................................................................................70
Consequences of CGT Event J2.................................................................................70
Application of Part IVA?...........................................................................................................71
Small Business CGT Concessions and Deceased Estates.....................................................................72
Application...............................................................................................................................72
ATO ID 2004/121.....................................................................................................................72
ATO ID 2004/531.....................................................................................................................73
Case Study........................................................................................................................................ 75
Background.........................................................................................................................................75
Required.............................................................................................................................................76
Issues to consider....................................................................................................................76
IV | August 2012: Small business CGT concessons | © Taxpayers Australia Inc