• Stricter new conditions for the Capital Gains Tax concessions on Selling a Small Business Entity (SBE)

The Federal Treasury on 8 February 2018 released Exposure Draft legislation and explanatory materials which introduce stricter new conditions which an owner of a small business must satisfy in order to apply the CGT SBE concessions.

Currently, taxpayers who either satisfy a minimum asset test or a small business entity test (where a turnover threshold of $2m applies) may benefit by substantially reducing (by up to 75%) their taxableeligible SBE discounted capital gain.

If these new rules are passed, they will operate retrospectively from 1 July 2017 onwards to require four new conditions to be satisfied if a taxpayer wishes to apply CGT SBE relief for a sale of shares in a company or an interest in a trust, as follows:

  • if the taxpayer does not satisfy the maximum net asset value test, the relevant CGT small business entity must have carried on a business just prior to the CGT event;
  • the object entity must have carried on a business just prior to the CGT event;
  • the object entity must either be a CGT small business entity or satisfy the maximum net asset value test (applying a modified rule about when entities are ‘connected with’ other entities), and
  • the share or interest must satisfy a modified active asset test that looks through shares and interests in trusts to the activities and assets of the underlying entities.

The Explanatory Materials set out a number of examples where the additional conditions would cause CGT SBE relief to be denied notwithstanding relief may have been available under the existing rules.