Dec 2021 5 Minutes
Accessing the CGT Small Business Concession on the Sale of Shares
The CGT Small Business Concessions (CGT Concessions) can enable a business owner to fully exempt up to $2 million of capital gains from tax, when coupled with the CGT 50% Discount. It is therefore a valuable concession that business owners should take advice on when they are considering the sale of their business.
For business operated in companies, it is often the sale of shares in that business company that triggers the capital gain rather than the sale of the business assets.
When shares are sold, to access the CGT Concessions there are additional conditions that have to be satisfied that do not apply where the business assets are sold.
These three additional basic conditions that must be satisfied are as follows:
- if the shareholder does not satisfy the $6 million Maximum Net Asset Value (MNAV) test, then they must have carried on a business just before the CGT event to personally qualify as a Small Business Entity (SBE);
- the Company in which they hold shares must either be a CGT SBE or satisfy the MNAV 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 in companies and interests in trusts to the activities and assets of the underlying entities.
The first condition requires that the shareholder is carrying on a business just before the CGT event if the MNAV test is not satisfied. The measure is intended to prevent shareholders from seeking to commence a business after the shares are sold but before the end of the relevant income year so as to qualify as a CGT SBE.
However, if a taxpayer satisfies the MNAV test in their own right (including connected entities), this requirement does not apply to the taxpayer.
The second condition requires that the Company must either be a CGT SBE or it satisfies the MNAV test in relation to the capital gain. The measure is intended to prevent the concessions being available for interests in entities that are carrying on a business that is not a small business as it has both substantial aggregate turnover or has significant net assets.
In applying the second condition, the following assumptions must be made:
- the only CGT assets or annual turnovers considered are those of the object entity, each affiliate of the object entity and each entity controlled by the object entity;
- an entity is taken to control another entity if it has an interest of 20% or more, rather than 40% or more.
The first assumption ensures that the CGT assets or turnover of entities that may control the object entity are disregarded. This is particularly relevant where the owners of the Company are unrelated.
On the other hand, the second assumption applies so that more entities could potentially be included as connected entities for the purpose of the test, except those entities that may control the object entity by virtue of the first assumption.
This condition has caused considerable angst amongst shareholders because it effectively limits the CGT Concessions on the sale of shares to shareholders in a company that itself is worth less than $6 million.
Prior to these changes being introduced from February 2018, shareholders holding between 20% and 40% of the shares in a company only needed to consider their % shareholding interest value in their own MNAV test. From February 2018, if the Company is valued at more than $6 million, no shareholder can access the CGT Concessions.
This final additional condition is arguably the most complicated requirement among the additional basic conditions. Under the modified active asset test, the 80% Active Asset test is modified to require at least 80% of the sum of the:
- total market value of the assets of the Company (disregarding any shares in companies or interests in trusts); and
- the total market value of the assets of any entity in which the Company has a small business participation percentage of greater than zero (later entity) multiplied by that percentage, must relate to assets that are active assets, or cash/financial instruments that are inherently connected with a business carried on by the object entity or a later entity.
In other words, the test requires a ‘look-through’ approach to any share or interest in any ‘later entity’ in applying the 80% test. Previously, if the shares or interest satisfied the 80% test, the shares would be treated as active assets and 100% of the shares or interest value would be counted towards to the value of the active assets of the interposed entity.
As always, if you are considering the sale of shares in their Company, it is important you receive advice before you sell to ensure you fully understand whether you are able to use the CGT Concessions.
If you would like to discuss the CGT Concessions, please contact Jane Chiang.