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Self Managed Super Fund (SMSF) Article
Small Business CGT Exemptions - Part 2
By Tony Negline.
This article may be out of date.
20th September 2006
Anyone running a small business needs to keep a close eye on how they access some capital gains tax concessions.
The rules that drive these concessions are not easy, but in many cases these concessions can produce significant tax savings which then help secure a decent retirement income.
To understand these rules it is essential to break them down into small bit-size chunks. There are rules that determine if you can access the concessions and there are additional rules which might apply later on. In this article, we will focus on the first set of rules.
There are three principal rules:
- The small business owners have net assets less than the allowed ``maximum net asset value''
- The asset is an ``active asset''
- If the asset is a share in a company or interest in a trust, then the company or trust must satisfy the ``controlling individual'' test and the entity claiming the concession must be a ``CGT concession stakeholder''.
What are ``maximum net assets''? This figure must be less than $5 million. From July 2007 the Government has agreed to increase this threshold to $6 million.
How do you work out your total asset value? This is the sum of the value of all your assets subject to CGT plus the value of assets subject to CGT assets of taxpayers that you control or are deemed to control plus the assets of any ``small business CGT affiliates'' (or entities connected with those affiliates).
Small business CGT affiliates include your spouse and children younger than 18 years or people who could reasonably be expected to act in accordance with your wishes or in concert with you. It does not include people who are partners in a partnership.
The value of an asset is determined by taking into account the market value of an asset less any liabilities related to that asset. At present, if an asset has a negative value, then that does not reduce the net value of all other assets. The Government has agreed that from July 2006 this will be allowed.
If the entity disposing of an asset is owned by a partnership, then the net assets of the partnership must be less than $5 million. The Government has agreed to remove this provision from July 2006.
When working out the net assets of an individual, you disregard assets not used in a business, the family home (a new rule will apply from July 2006 if the house is used to produce business income), superannuation investments, including pension or annuity income, and life insurance policies.
At this point, the exemption of superannuation can be an important way to ensure access to these small business CGT concessions. Some people contribute money to super thereby reducing their level of assets so they can access the CGT concessions. However, as always with superannuation, the issue of accessing funds and the tax rate that applies on those withdrawals is always an issue.
The next issue we need to address is an ``active asset''. It is an asset owned and used (or held ready for use) in the course of carrying on a business. There are special rules for a range of assets including intangible assets (for example, patents or goodwill) and financial instruments (derivative contracts).
Let us now turn our attention to a ``controlling individual'' and ``CGT concessions stakeholder''. A controlling individual is a natural person (under tax law sometimes a person can be a trust or company) who owns at least 50 per cent of the legal and beneficial interests in an entity or is entitled to at least 50 per cent of distributions (income and capital) from a discretionary trust.
A CGT concession stakeholder is a natural person who is a controlling individual in his or her own right or the spouse of the controlling individual, who also holds an interest in the entity.
Where the active asset is a share in a company or an interest in a trust, one of the key requirements for eligibility for the small business CGT concessions is that the company or trust must satisfy a controlling individual test and the taxpayer claiming the CGT concessions must be a CGT concession stakeholder in the company or trust. The existence of a controlling individual is also necessary for certain types of the small business CGT concessions to be used by a company or a trust -- in particular, the retirement exemption and the 15-year exemption.
On the face of it, controlling individual and CGT concession stakeholder seem to be important because they are used when an actual business is sold. Some people will need to know these rules really well because that is how they sell their business. However, the vast majority of small businesses do not sell their business entity. Instead, they sell assets that are in the business (for example, goodwill, intellectual property, business premises, and so on).
Once a small business owner has navigated their way through these rules, they need to look at how to apply the actual CGT small business concessions. Of particular interest is the CGT exemption available when the proceeds are put into super. This is called the CGT small business retirement exemption. How you access this and the administration procedure you must follow will be the subject of a future column.
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