11 March 1996 - 3 December 2007
CAPITAL GAINS TAX (CGT): GOVERNMENT RESPONSE TO THE BOARD OF TAXATION’S REPORT ON THE POST-IMPLEMENTATION REVIEW OF THE SMALL BUSINESS CGT CONCESSIONS AND OTHER IMPROVEMENTS
I thank the Board of Taxation for its excellent work in producing the report. The report is available on the Board’s website at www.taxboard.gov.au/content/publications.asp.
The Government will 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 partnerships.
The comprehensive report has 39 recommendations. Of these, 26 recommendations seek legislative amendments and 13 relate to administrative matters. The Government has accepted all but one of the legislative amendment recommendations, 3 with minor amendments favouring the taxpayer, (see the attachment for further details). The Australian Taxation Office (ATO) has accepted all recommendations relating to administrative matters.
New significant individual 20% test
In addition, to improve access to the concessions, the Government will replace the current controlling individual 50per cent test with the new significant individual 20per cent test that can be satisfied either directly or indirectly through one or more interposed entities.
Currently there is a limit of two controlling individuals or one controlling individual and their spouse who has an interest in the business. The controlling individual test applies where the concessions extend to an entity that did not make the relevant capital gain (that is, the 15-year exemption and the retirement exemption).
The new significant individual test would enable up to eight taxpayers to benefit from the full range of concessions instead of the current limit of two controlling individuals.
The small business CGT concessions are intended for active participants in a small business. The basis for the proposed significant individual test is to identify those who have a substantial interest in a small business, for they tend to have an active interest in running the business.
All amendments will apply to CGT events that happen from the 2006-07 income year.
9 May 2006
Contact: David Alexander
(02) 6277 7340
Government’s responses that differ from the Board of Taxation report’s recommendations
Board of Taxation’s recommendation
Recommendation: Where a business has ceased, an asset which was ‘active’ immediately before the cessation of the business may attract the small business CGT concessions provided it is sold within 12 months of the cessation of the business (or within such further time as the Commissioner allows).
To avoid the unintended denial of the small business CGT concessions on the sale of business premises and other active assets, section 152-35 should be amended to allow for a similar 12 month period for the disposal of an asset after the cessation of use of the asset in the business, irrespective of whether the business itself has actually ceased.
The Government has accepted this recommendation, but on the basis that it is sufficient that the asset be an active asset for the lesser of half the period of ownership or 7years. This modification favours the taxpayer.
Recommendation: The requirement for an entity to have a controlling individual to qualify for the small business 15-year exemption is tested over the entire period of ownership of the particular active asset by the entity.
To reduce compliance costs and provide a simple and more practical and workable rule, the requirement for a company or trust to have a controlling individual in paragraphs 152-105(c) and 152-110(1)(c) should be limited to 15 years, to match the required ownership period for the relevant active asset (that is, the last 15 years of ownership only).
The Government has accepted this recommendation, but requiring that there be only a significant individual (rather than a controlling individual) and only for any period or periods totalling 15years. This modification favours the taxpayer.
Recommendation: Where a deceased’s legal personal representative (LPR) disposes of an asset which had been an active asset in the hands of the deceased, the estate cannot automatically qualify for the small business CGT concessions.
To provide more workable rules for the treatment of active assets on the death of an individual, and to promote consistency of treatment of assets under the CGT rules generally, Division 152 should be amended to allow the deceased’s LPR or a beneficiary of the deceased’s estate to be eligible for the small business CGT concessions where:
• the asset is disposed of within two years of the date of death, and
• the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before his or her death.
The Government has accepted this recommendation, but with the modification of including a discretion for the Commissioner to extend the two-year period in appropriate cases. This modification favours the taxpayer.
Recommendation: Where the retirement exemption applies in relation to payments from a company, it is possible for various deemed dividend provisions to apply to the transaction.
To clarify the application of the deemed dividend provisions in section 109 and Division 7A, and support the policy of allowing a lifetime limit of $500,000 to fund the retirement of a CGT concession stakeholder, amendments should be introduced to ensure that none of the deemed dividend provisions have application in relation to CGT exempt components within the meaning and limits of Subdivision 152-D.
The Government has not accepted this recommendation.
The safeguarding nature of the deemed dividend provisions should not be potentially undermined by reason of a CGT exemption.