The small business CGT concessions provide a significant tax advantage to eligible taxpayers. Their focus is to allow the concessions for capital gains made on business assets that are owned by a small business. This is achieved through two principal basic conditions:
- the Active Asset Test, which limits entitlement to the concessions to assets used in the business of an entity within the taxpayer’s group; and
- a size test – either a $2 million turnover test or a maximum net asset value test.
This article is concerned with the maximum net asset value test (MNAV).
At present the MNAV provides for a threshold of $6 million. Prior to 1 July 2007 the threshold amount was $5 million. The application of the test is not limited to the taxpayer, otherwise it would be a relatively simple matter to separate the ownership of assets into separate entities to bring the taxpaying entity under the threshold. To overcome that possibility, the MNAV requires that you identify a relevant group of entities and determine whether the net value of CGT assets of those entities exceed the $6 million threshold. When the concessions were first introduced in 1997, the group was limited to:
- the taxpayer;
- persons or entities that control the taxpayer (controllers); and
- entities that the taxpayer or controllers control.
At that stage, the assets of affiliates were not taken into account. At that time, an asset could only be an active asset where it was used in a business carried on by its owner. The concept of affiliate was introduced in the 1999 year, when the concessions were amended to allow assets used in the business of a connected entity or an affiliate to be eligible for the concessions. At that time, the MNAV was amended to include assets of affiliates who use the asset in respect of which the concessions were being claimed and the share of any affiliate’s interest in a partnership.
This position differs under the current legislation. Instead, affiliates are taken into account in the following manner:
- assets of all affiliates of the taxpayer are included;
- assets of entities controlled by affiliates of the taxpayer are included;
- in determining whether an entity is controlled by a taxpayer, include the interests of affiliates of the taxpayer; and
- in determining whether an entity is controlled by a controller, include the interests of affiliates of the controller.
In an apparent attempt to achieve the same results as existed in the 1999 legislation, there is then an exclusion (that is not well understood) for assets of certain affiliates in Section 152 – 20 (3). It excludes assets of a taxpayer’s affiliates and entities connected with a taxpayer’s affiliates that are not used in the business of a taxpayer, or a connected entity.
In Altnot, the taxpayer was a company that owned a 50% interest in a partnership. All the shares in the taxpayer were owned by the husband. Altnot sold its 50% interest in the partnership business which generated a capital gain. The wife owned significant other assets which, if taken into account, would cause Altnot to fail the MNAV.
The issues were:
- whether the assets of the wife were required to be taken into account in the MNAV; and
- if so, whether they could be excluded by Section 152-20 (3).
Altnot was concerned with a capital gain made in the year ended 30 June 2007. The concept of Affiliate at that time specifically included one’s spouse. It should be noted that from 1 July 2007. The inclusion of a spouse has been removed.
Whether wife’s assets are included
On the basis of the information set out in the Background, it would be easy to come to the following conclusions:
- the taxpayer is Altnot;
- the controller is the husband (who owns 100% of the shares);
- assets directly owned by the wife are not taken into account because she is not an affiliate of the taxpayer, she is only an affiliate of the husband; and
- assets of entities controlled by the wife were to be included (in accordance with point d above).
The problem with the above analysis is that a person is considered to control an entity in one of three ways: 1. the person controls the entity, 2. the person together with affiliates control the entity, or 3. the person’s affiliate alone controls the entity. In this case, the husband was an affiliate of the wife and therefore the wife controlled the entity in the third way.
In that sense, the assets of the wife were taken into account, not as an affiliate, but as a connected entity (controller).
Exclusion in Section 152-20 (3)
The next question for consideration is whether the wife’s assets fall within this exclusion.
Affiliate are taken into account in the four ways outlined in points a-d above. Of particular relevance is that the exclusion only applies to affiliates of the taxpayer, not affiliates of a controller. Therefore, even if the husband were considered a controller, the assets of entities controlled by the wife would not be excluded because she is not an affiliate of the taxpayer (Altnot).
In any case, the wife was considered to be a controller (not an affiliate) and therefore the exclusion did not apply.
Benefits of forward planning
With the benefits of proper planning, the client in this case could have satisfied the conditions.
Consider the result if, instead of the assets being sold by Altnot, the shares in Altnot were instead sold. In that case, the conclusion would be:
- the taxpayer is the husband (Altnot.);
- the wife is an affiliate of the husband; and
- any assets of the wife or entities controlled by the wife would satisfy the exclusion in Section 152-20 (3) unless they were used in the business of Altnot or the husband.
If the above were the case, the MNAV would have been clearly satisfied.
- The small business CGT concessions provide a particular tax advantage where you satisfy the relevant conditions.
- The conditions contain various quirks which produce traps for those not advising in this area on a regular basis.
- Where tax is involved, many clients take the view that their accountant alone can deal with it at the end of the financial year.
- Taking that simplistic approach can result in the client not being entitled to these concessions, a result that can often be avoided with properly advised forward planning.