TAXATIO CAPITAL GAIS TAX COCESSIOS FOR SMALL BUSIESS COTETS Page 1. Introduction CGT Concessions... 2 2. 50% Capital Gains Tax Discount For Individuals... 2 3. Capital Losses... 3 4. Order Of Concessions... 3 5. Basic Conditions For The Small Business CGT Concessions... 3 6. Maximum et Asset Value Test... 4 7. Small Business Capital Gains Tax Concession... 4 8. Fifteen ear Small Business Exemption... 4 9. Active Asset Test... 5 10. Additional Conditions... 5 11. CGT Concession Stakeholder... 5 12. Significant Individual Test... 5 13. The 90% Test... 6 14. The Retirement Exemption... 6 15. Rollover Into Replacement Assets... 7 16. Small Business Concession Capital Gains Tax Calculation Sheets... 7 17. Professional Advice... 7 ADDEDUMS 012-021A CGT Concessions For Small Business... 8 012-021B Small Business Capital Gains Tax Calculation Sheet... 9 - ESS BIZTOOLS Pty Ltd - AC: 078 451 439 Page 1
TAXATIO CAPITAL GAIS TAX COCESSIOS FOR SMALL BUSIESS 1. Introduction CGT Concessions Before reading this paper, it is recommended that you read Paper 012-020 - Capital Gains Tax - Introduction) to gain an understanding of the parameters of the Capital Gains Tax Legislation. This paper deals specifically with Capital Gains Tax Concessions available to small business. 2. 50% Capital Gains Tax Discount For Individuals Some taxpayers that make a capital gain after 21st September 1999 from an asset acquired before 21st September 1999 and owned for at least twelve months may choose to index the cost base (frozen as at 30th September 1999)(refer Paper 012-020 - Capital Gains Tax - Introduction) or apply the CGT Discount, if certain conditions are satisfied. Indexation is not available for assets acquired after 21st September 1999, but the CGT Discount may apply if the relevant conditions are met. Assets subject to Capital Gains Tax held for at least twelve months by an individual holding assets in their own names (including partners in partnership and trusts) and disposed of after 21st September 1999 will be eligible for discounting at a rate of 50% (which is known as the "50% Capital Gains Tax Discount"). There are further rules for trust beneficiaries who are entitled to a share of a trust capital gain. (Refer to Item 10). Companies are ineligible for the 50% Capital Gains Tax Discount. The 50% Capital Gains Tax Discount is calculated on the non-indexed capital gain calculated on the disposal of the asset. This figure is then reduced by 50%. The 50% discount amount is known as the "CGT Discount". The type of assets that the "CGT Discount" can apply to include: rental properties, commercial properties and land shares in public companies shares in private companies units in unit trusts units in public unit trusts active business assets - ESS BIZTOOLS Pty Ltd - AC: 078 451 439 Page 2
If the asset is held for less than twelve months, then it is not eligible for the "Capital Gains Tax Discount". There is no "asset test" applied to an eligible person or entity to be able to utilise the Capital Gains Tax Discount. 3. Capital Losses ou offset capital losses (Refer Paper 012-020 - Capital Gains Tax - Introduction - Item 20) against capital gains before applying the CGT Discount. 4. Order Of Concessions The CGT Discount is applied before the Small Business CGT Concessions (apart from the Small Business 15-ear Exemption - refer Item 8). 5. Basic Conditions For The Small Business CGT Concessions ou must first satisfy at least one of the following basic conditions: you are a Small Business Entity (Refer to Item 5.4); or you satisfy the Maximum et Value Test (Refer to Item 5.5); or you are a partner in a partnership that is a Small Business Entity and the CGT asset is an asset of the partnership. The asset is an Active Asset. (Refer to Item 5.6). If the CGT asset is a share in a company or an interest in a trust there are additional conditions to be satisfied. (Refer to Item 5.7). A Small Business Entity relates to an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover of less than $2M. Aggregated turnover is your annual turnover plus the annual turnover of any businesses that are connected with you or that are your affiliates. To pass the Maximum et Asset Value Test the total net value of CGT assets must not exceed $6M. The Active Asset Test requires the CGT asset to be an active asset for: 7½ years, if owned for more than 15 years; or half of the period of ownership if owned for less than 15 years. An active asset may be a tangible asset (such as land) or an intangible asset (such as goodwill). If the CGT asset is a share in a company or an interest in a trust, then you must also satisfy the following additional tests before the CGT event: ou must be a CGT concession stakeholder in the company or trust ;and The market value of the active assets of the company or trust must be 80% or more of the market value of all the assets of the company or trust. The share or trust interest can also qualify as an active asset if the company or trust owns interests in another entity that satisfies the 80% test. A checklist for the determination of whether a Capital Gains Tax Concession is available for a Small Business Entity is attached in Addendum 012.021A. - ESS BIZTOOLS Pty Ltd - AC: 078 451 439 Page 3
6. Maximum et Asset Value Test The basic condition that has to be met is referred to as the "Six Million Dollar et Asset Value Test". This means the market value of: the individual's net assets and the net assets of entities connected with the individual, including companies and trusts, which the individual can directly or indirectly control and the net assets of a spouse, child under 18 or a person who acts or could reasonably be expected to act in accordance with the individual's directions or wishes All have to be included to determine whether the six million dollar net asset threshold has been exceeded. For an individual the following assets are ignored in calculating the six million dollar threshold: personal use assets ownership of a dwelling utilised for residential purposes superannuation fund asset life insurance policy 7. Small Business Capital Gains Tax Concession There are four Capital Gains Tax concessions available for eligible small business entities: 15 year CGT asset exemption; 50% active asset reduction; retirement exception - provides a full exception for part or all of a capital gain made at the time the taxpayer intends to retire up to $500,000 rollover concession into replacement assets - defers any capital gain until the replacement asset is sold or its status changes. 8. Fifteen ear Small Business Exemption If you qualify for the Small Business 15-ear Exemption, you can entirely disregard the capital gain. ou do not need to apply any other concessions and you do not have to apply capital losses against your capital gain before applying the 15-ear Exemption. For this exemption to be utilised, the individual must have continuously owned the asset for at least fifteen years and satisfy the basic conditions for Small Business CGT relief (Refer to Item 5): The Active Asset Test requires the asset to be have been an active asset for at least 7.1/2 years of the whole period of ownership. If the asset is a share in a company or an interest in a trust, at all times during the period of at least fifteen years, the individual must have owned the asset or the company or the trust had a significant individual(s) (Refer to Item 12 - "Significant Individual Test") during the whole of that fifteen year period, not necessarily the same person. Had an individual who is aged 55 years or over and the disposal has been made in connection with his/her retirement or the individual is permanently incapacitated at the time of the disposal. The capital gain is completely disregarded and no Capital Gains Tax is payable, if these conditions are met. - ESS BIZTOOLS Pty Ltd - AC: 078 451 439 Page 4
9. Active Asset Test For a taxpayer to utilise this exemption: the asset must be a business asset that is active in the business either just prior to the CGT event or within twelve months of the CGT event if the business ceased to be carried on; and must have been used in the business for more than 50% of the period of ownership. An "active asset" is an asset owned by a taxpayer that is used in the course of carrying on a business. If it is an intangible asset, it is inherently connected with the business being carried on by the taxpayer e.g. goodwill. The periods in which the asset is an "active asset" do not need to be continuous, however they must add up to the minimum period of 50%. A share in a company, which carries on, a business or an interest in a trust can qualify as an active asset. The 50% active asset reduction, if applicable, is claimed after the CGT general discount concession of 50%. 10. Additional Conditions If the CGT asset is a share in a company or an interest in a trust which are held by a company or trust, then just before the CGT event: the entity claiming the concession must be a CGT concession stakeholder in the company or trust; and there must be at least one CGT concession stakeholder who with other CGT concession stakeholders have a a small business participation percentage in the interposed entity of at least 90%. 11. 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 at the time that is greater than zero. The participation percentage can be held directly or indirectly through one or more interposed entities. 12. Significant Individual Test 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. A company or trust satisfies the "Significant Individual Test" if it had at least one "significant individual" just before the CGT event. The Small Business 15 ear Exemption further requires a company or trust to have a "significant individual" for periods totalling at least 15 years of the ownership of the CGT assets. - ESS BIZTOOLS Pty Ltd - AC: 078 451 439 Page 5
Example 1 Small Business Entity Turnover Under $2M Company With Shares Owned By Individuals Q11 Did the company or trust comply with the Concession Stakeholder Test? Sharehold Shareholder 1 60% Shareholder 2 10% Shareholder 3 20% Shareholder 4 10% ABC Pty Ltd Business Retail Shop Turnover $1.7m Operated the retail business for 12 years. If the Shareholder o. 3 sold their 20% interest in ABC Pty Ltd, Shareholder o. 3 would qualify for the CGT Small Business Concessions. 13. The 90% Test The "90% Test" only applies if there is an interposed entity between the CGT concession stakeholders and the company or trust in which the shares or interests are held. The interposed entity satisfies the test if the CGT concession stakeholders of the company or trust hold 90% of the participation percentages in that entity in which the shares or interests are held. Example 2 Small Business Entity Turnover Under $2M Discretionary Trust sells shares in a Company Q13 Did they comply with the 90% test? Jones Family Discretionary Trust Beneficiary Distribution Mr X. 95% XZ Pty Ltd 60% Interest Motor Mechanics Business Turnover $1.2m Operated the Business for 17 years The trust complies with the Concession Stakeholder Test because Mr X s interest in XZ Pty Ltd is 57% (95% x 60%)(satisfies Concession Stakeholder Test) and his interest in the Trust is 95% (satisfies 90% Test). 14. The Retirement Exemption This exemption is applied after the CGT discount of 50%, if applicable, and the 50% active asset reduction, this exemption can be applied or disregarded. The individual lifetime exemption is $500,000. - ESS BIZTOOLS Pty Ltd - AC: 078 451 439 Page 6
If the individual is under 55 years of age, the retirement exemption must be rolled over into a complying superannuation fund. The retirement exemption amount is completely disregarded in the calculation of Capital Gains Tax. 15. Rollover Into Replacement Assets A taxpayer who is eligible for the capital gains tax small business concessions can defer capital gains tax by acquiring a replacement active asset, thus deferring the payment of the capital gains tax on the original sale until the subsequent acquired active asset is sold, although at that stage, there could be a further rollover into a replacement active asset. At that time, one or more of the other small business capital gains tax concessions may also apply. The rollover concession can be applied after: the CGT discount of 50% the 50% active asset reduction; and retirement exemption (if any). The balance remaining maybe rolled over into the cost of acquisition of new business assets within two years of the sale of the active asset, thus deferring, until those new business assets are ultimately sold, any Capital Gains Tax. If there were any balance remaining after the application of the rollover, then that amount would be subject to Capital Gains Tax. 16. Small Business Concession Capital Gains Tax Calculation Sheets A Small Business Concession Capital Gains Tax Calculation Sheets, which will assist in the calculation of Capital Gains, are in Addendum 012.021B. 17. Professional Advice Capital Gains Tax is a very complicated area of the Income Tax Legislation. Any person contemplating any business investments, sale of assets, restructuring of their business affairs are encouraged to seek professional advice from their professional accountant before embarking on any changes or investments. - ESS BIZTOOLS Pty Ltd - AC: 078 451 439 Page 7
012-021A CGT Concessions For Small Business Small Business Entity Turnover Under $2M Q1 Entity Type What type of entity owned the CGT Asset? Addendum 012-021A Concession.1 Individual.2 Partnership.3 Company.4 Trust (Go to Q2) (Go to Q2) (Go to Q2) (Go to Q2) Q2 Is the entity carrying on a Business? (If answer o do not qualify under Small Business Concession) (Go to Q3) Q3 Does the entity have a turnover less than $2M (If answer o - do not qualify under Small Business Concession) (Go to Q4) Q4 Was the CGT asset an Active Asset? CGT asset must have been an Active Asset for:- 7½ years if owned for more than 15 years; or half the period of ownership if owned for less than 15 years (If answer o do not qualify under the Small Business Concession) If you are an individual or partnership and you answered es to Q2, 3 and 4, you qualify for CGT Small Business Concessions. If the CGT Asset is a share in a company or an interest in a trust there are additional questions to be answered. Q5 Were 80% of the assets owned by the Company or Trust Active Assets? (Calculated by market value) (If answer o do not qualify under the Small Business Concession) (Go to Q4) Q6 Was the share in the company or interest in the trust owned by an individual? (Go to Q4) (Go to Q8) Q7 Just before the CGT event, did the individual or the individual s spouse have interests directly or indirectly in the company or trust that carried entitlements of at least 20% of the dividends, capital distribution or voting power in the company or trust? (If answer es you qualify for CGT Small Business Concessions) Q8 Did the CGT Concessional stakeholders in the entity in which the shares or interest are held between them directly or indirectly own 90% of the shares or interest in the company or trust that made the capital gain? (If answer es you qualify for CGT Small Business Concessions) - ESS BIZTOOLS Pty Ltd - AC: 078 451 439 Page 8
Addendum 012-021B 012-021B Small Business Capital Gains Tax Calculation Sheet (OTE: This form is only applicable to taxpayers eligible for Small Business CGT Concessions) ame: Date: Ref. 1. In whose name is the investment held? 2. Asset name? 3. Date of acquisition of the asset? 4. Cost of asset? 5. Indexed Cost to 30th September 1999 (if applicable) 6. Date of sale? 7. Was the asset held for more than 12 months? (If not the CGT Discount Method cannot be used) 8. Sale price? 9. Calculation of Capital Gain Sale price Less: Indexed Cost to 30.9.99 Cost Margin Less: Current ear Capital Losses Capital Losses Carried Forward Capital Gain After Capital Losses Less CGT Discount (50% for Individuals or Trusts and 33.1/3% for Superannuation Funds) CAPITAL GAI: 10. If you and your affiliates' net business assets are under $6m or your business turnover is under $2m per annum, you may be eligible for further Capital Gains Tax Exemptions. (Refer Item 5) Using Indexation Method Using CGT Discount - ESS BIZTOOLS Pty Ltd - AC: 078 451 439 Page 9
11. Are you eligible for further Capital Gains Tax Exemptions? es o If o, no further calculations. If es proceed to 12. 12. Capital Gain $ 13. Less: 15-ear Asset Exemption (Are you eligible?)(refer Item 7)(Refer - Capital Gains Tax Concessions For Small Business) $ (Go to 15) 14. Balance Remaining (will be "IL" if "15-ear Asset Exemption" applies) $ Less: 15. 50% Active Asset Reduction (Are you eligible?)(refer Item 9) (Refer Paper 012-021 - Capital Gains Tax Concessions For Small Business) $ 16. Balance Remaining: $ Less: 17. Retirement Exemption (maximum life time benefit $500,000 each) Are you over 55? es o If you are under 55, this exemption must be rolled into a Superannuation Fund $ 18. Balance Remaining: $ Less: 19. Rollover into Replacement Assets $ 20. ET CAPITAL GAI SUBJECT TO TAXATIO: $ - ESS BIZTOOLS Pty Ltd - AC: 078 451 439 Page 10
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