How a property can qualify for the 15yr tax exemption
Q. We own a commercial property in country Victoria. There are two shops and 5 storage garages. I do all correspondence, invoicing, negotiate the leases, collect the rent, manage the accounts and complete general maintenance. We have held the property for approx. 14 years. Would this qualify as a small business allowing us to take the 15 year exemption and be a CGT-free sale ?
A. You refer to the 15 year exemption, which is one of the four CGT small business concessions. Under this exemption the entire capital gain realised on disposal of a CGT asset is exempt from tax if you satisfy the conditions under Subdiv152-B.
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Don’t let your share structure trip you up
Many companies have different classes of shares but when it comes time to sell, this share structure might be an impediment.
There are a number of reasons why differential share structures are used – the ability to provide different rights to equity holders and allowing dividends to be paid to one class of shareholder in preference to another are common reasons. Much of this comes down to the way the company is managed and the arrangements between shareholders. Having different share classes can provide an additional level of flexibility in the ownership of a company.
There is however one occasion where different share classes can work against you; when the company sells capital assets, triggers a capital gain and wants to reduce that capital gain by accessing the small business CGT concessions. The most common example of this is the sale of the business or shares in the company. The concessions are attractive because they can defer capital gains tax or reduce it to zero.
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CGT Concessions require some homework
Q. I read your recent comments on the CGT small business concessions on the sale of a business. We are in the final stages of negotiations and expect to go to contract next month. Our problem is that we probably don’t qualify for the concessions based on the maximum net asset test of $6 million. We’re not over by a lot but I think we are over. How tightly is it tested?
A. This is an area that you need to be careful with and where a lot of SMEs are coming unstuck. The ATO are quite active in checking the maximum net asset test where a business claims the CGT small business concessions. This test is one of the basic conditions for relief under s.152-10 of the Tax Act. It is tested at the time of CGT event, and if you fail this test then you are not eligible for the concessions unless you are a small business entity with turnover less than $2 million per annum in which case you do not need to satisfy the maximum net asset test.
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Managing Tax on Sale of Business
Q. We exchanged contracts for the sale of our business just before the end of the financial year. The sale is expected to settle at the end of July. We plan to take a break for a few months and then look at our options. This could include buying another business, but at this stage we are not sure. Are there any options for us in managing the tax on the sale and when do we need to account for it?
A. You need to talk with your accountants about this because they should be familiar with your tax position and best able to advise you on the most appropriate option for you. There are, however, some general principles to consider.
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Earn-out relief is still a way off
Q. I read your recent comments on earn out rights and the budget changes proposed for their CGT treatment.I previously sold a business in 2003 with an earn out right.It was paid out in December 2007. Will this budget change provide any relief for my situation?
A. Unfortunately the most likely answer is no. At this stage we only have the budget announcement about the change so we will need to wait and see the detail of the legislation to enact the change.
However the budget indicated that the effective date for the change would be the date of Royal Assent to the amending legislation with some transitional arrangements being provided from 17 October 2007. From your information it sounds as though your CGT event and most of your earn out rights occurred prior to this date.
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