Accessing CGT small business concessions

The capital gains tax (CGT) small business concessions are playing an increasing role in business owners’ retirement plans. Not only do they provide a CGT tax break, they can also allow additional superannuation contributions using the CGT non-concessional contribution cap of up to $1.1 million (indexed).

Qualifying for this additional cap takes on even greater significance given the reduction in concessional contribution cap limits from July 1, 2009, announced in the Federal Budget.

Recent legislation has altered the qualifying rules that apply when accessing these CGT concessions, with the changes generally applying retrospectively from July 1, 2007.

The major change is designed to increase access in situations where the disposer of the asset doesn’t actually carry on a business. That is, where the asset is instead used in a business carried on by the disposer’s affiliate or a connected entity.

Effectively, the changes will now allow the small business definition based on turnover to also be applied in these situations, as long as the disposer’s asset is used in a business carried on by an affiliate or connected entity that can satisfy the ‘under $2 million turnover’ test (see diagram below).

Applying the turnover test

The small business CGT concessions broadly apply to the disposal of an active asset by a small business, with a small business generally being required to meet either the $6 million maximum net asset value (NAV) test or, alternatively, the under $2 million turnover test.

The problem that has existed to date is that the under $2 million turnover test could only be used in situations where the disposer of the asset actually carries on a business.

A common example of a situation where the under $2 million turnover test would not be available is where a person owns business premises in their own name but does not carry on a business as a sole trader. Rather, they run their business via an entity that they control, such as a private trust or company.

In such a situation, even though the disposer’s asset may be considered an active asset, because their affiliate or connected entity carries on a business and uses the asset in that business, the disposer in these situations could not use the under $2 million turnover test. Instead, the disposer had to rely solely on the $6 million maximum NAV test in order to qualify as a small business.

The new legislation fixes this problem. The change will allow the disposer to use the under $2 million turnover test as an alternative to the $6 million maximum NAV test even though the disposer doesn’t carry on a business.

However, this change will only apply provided the affiliate or connected entity that uses the disposer’s asset in its business satisfies a modified version of the under $2 million turnover test.

Partnerships

In a similar way, increased use of the under $2 million turnover test will apply in business partnership situations.

Under current rules, the under $2 million turnover test can already apply on disposal of a ‘partnership asset’. That is, where the asset is owned by all the partners in the partnership, and at the time of the asset disposal the partnership satisfies the under $2 million turnover test requirements.

However, the under $2 million turnover test could not be used where the disposal was made by one of the partners of an asset that the partner owns separately but has made available to the partnership for use in the partnership business.

The new legislation will allow the under $2 million turnover test to also apply where a partner disposes of a separately owned asset, as long as the partnership using the asset in its business satisfies a modified version of the under $2 million turnover test.

Observations

In light of the tightening concessional superannuation contribution caps, where full advantage can be made of these CGT concessions, a person’s ability to utilise the up to $1.1 million CGT cap will significantly enhance their superannuation-funded retirement benefits.

John Ciacciarelli is a technical services manager at AMP.