Q&A: What are the consequences of the CGT concessions?

Article taken from The Taxpayer. Published March 2019.


Tax & Super Australia (TSA) members often call in asking about eligibility for the Capital Gains Tax (CGT) small business concessions. Recently, a member went a step further and asked about the consequences of the available concessions once eligibility is determined. TSA’s tax team explores the issue.

Scenario

A business operated by a company was sold. A capital gain was made in the company on the sale and the member was satisfied that the basic conditions for CGT small business relief were met.

Question

Can you provide some guidance on the implications of choosing from the four CGT small business concessions available to the company in relation to the after tax capital gain being paid out to the shareholders?

Guidance

The four CGT small business concessions which can apply under ITAA 97 Div. 152 are:

1. The small business 15 year exemption
2. The small business 50% reduction
3. The small business retirement exemption
4. The small business rollover

Note that because the business was sold by the company, the general 50% discount (as distinct from the small business 50% reduction) is not available to the company.

Points to note
There are choices, which can be made when applying the four CGT small business concessions, and the choices can have a different impact when it comes to paying out the capital gain from the company.

1. Small business 15 year exemption

In the case of a company, the capital gain is disregarded if the conditions included in section 152-110 are satisfied. If eligible, having the capital gain entirely disregarded in the company is a favourable tax outcome. However, what about the subsequent payment of the funds to the shareholders? 

Subsequent payments made by the company to its CGT concession stakeholders (ie. a significant individual, being an individual with a small business participation percentage in the company of at least 20% (s152-55)), or a spouse of a significant individual who has a small business participation percentage (ie voting power, dividend and capital entitlement in the company greater than zero) are exempt from tax, subject to the payments being made within the time limits set down in s152-125.

If the 15 year exemption applies there is no need for any further concessions to apply. However, if the conditions for the 15 year exemption cannot be satisfied, the next option is:

2. The small business CGT 50% reduction

Taxpayers can choose not to apply the 50% asset reduction and instead opt for either the CGT retirement exemption or the small business rollover concessions.

One point with the 50% reduction option is that whilst it is not taxable at the company level, it would be taxable if paid out as a dividend in the normal course of events. However, subject to certain conditions being met, if the distribution of the exempt 50% component was made by a liquidator, the amount isn’t deemed to be a dividend (TD 2001/14). In the case of a liquidator payment, the 50% exempt amount would be included as consideration for the cancellation of the shares in the company being liquidated – however the general 50% discount could apply.

Therefore, not applying the 50% reduction option could be beneficial if the amounts could be paid out for the benefit of shareholders more tax effectively using the remaining two concessions.

3. CGT retirement exemption

You can choose to disregard the capital gain if the proceeds are used in connection with retirement (s152D being the relevant legislation, in particular s152.305(2) regarding companies).

Some points to note:

• The 50% reduction applies before the retirement exemption unless the taxpayer chooses not to apply the 50% reduction.
• The retirement exemption can be utilised before or after the small business rollover.

If the CGT retirement exemption is chosen, the part of the capital gain equal to its CGT exempt amount is disregarded by the company. Section 152.325 at paras 9, 10, and 11 state when the payments are not considered to be dividends. Also, the classification as non-assessable non exempt income to a CGT concession stakeholder prevents CGT event G1 (capital payment for shares) applying to the payment received from the company.

4. CGT rollover

The small business 50% reduction applies before the rollover. However, as mentioned, you can choose not to use the 50% reduction.

The rollover may be utilised before or after the CGT retirement exemption.

The rollover is a deferral option so that where a replacement asset is not acquired within the required time frame (s104-190 provides the time frame requirements) then CGT event J5 happens or J6 if the replacement asset cost less than the rollover amount.

When you choose the rollover you can disregard all or part of the gain and you can subsequently apply the CGT retirement exemption to a CGT J2, J5 or J6 event.

The facts of each case will determine the choices to make for the most favourable tax outcomes depending on eligibility for each of the four concessions.

 

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