Keep under the $6m asset limit for small business and you will realise CGT concessions, says Peter Bembrick.It is becoming easier and easier to use the small business CGT concessions, in many cases allowing small business owners to pay little or no CGT on the sale of their business.
New definition of affiliate
It has been widely reported that the net assets test threshold recently increased from $5m to $6m, but a lesser known change is a narrowing of the definition of affiliate. This is relevant for families when deciding which assets to include when testing the $6m limit. In many cases it is now possible to ignore any assets held by a spouse, including their share of jointly owned investment assets, as spouses and children under 18 are no longer automatically treated as affiliates.
In fact, under the new definition, a spouse will be an affiliate only if they act in accordance with an owner’s directions or wishes, or in concert with them, in relation to the affairs of their own separate business.
This may apply where a spouse does carry on a separate business in their own right, but in most situations this will not be the case.
More commonly, a business owner’s spouse will simply be a beneficiary of a family trust or possibly a minority shareholder in a family company. In these situations, they will not be an affiliate of either the business operator or the business entity, and can be excluded from the net assets test.
Including the value of related entities
It gets better because, by excluding a spouse from the definition of affiliate, some related entities will no longer be grouped under the net assets test. This can be crucial to the outcome of the net assets test, especially when selling shares in a company.
It is generally more tax effective to sell shares rather than sell the business assets, and if entities can avoid grouping it will often be the key to accessing the CGT concessions.
Related entities and individuals are usually grouped where one has control over the other, or they are under common control. When testing control, shares held by affiliates are combined.
While an owner/operator and their spouse may together have a controlling interest in a related company or trust, an entity will usually not be grouped unless the owner has control in their own right. AP
* Peter Bembrick is a partner with accountants and business and financial advisers HLB Mann Judd Sydney
Example 1: Grouping a company with an individual shareholder
Tom owns 30% of the shares in Red Print Pty Ltd, and his wife Trish owns 15%. The company has a total value of $10m, and Tom has an offer to sell his shares for $3m.Under the old rules Tom would be treated as controlling the company because he and Trish hold more than 40% of the shares between them. Tom would need to include the total value of the company ($10m), so would clearly breach the $6m net assets limit, and would not be able to use the CGT concessions to reduce his tax on the share sale.
However, under the new rules, Tom and Trish are treated separately, with neither of them treated as having control, and Red Print would not be grouped. By including only Tom’s 30% interest at a value of $3m, it is still possible that he will be able to use the CGT concessions when selling his shares.
Example 2: Excluding investment assets held by a spouse
The Green Family Trust holds 60% of the shares in Blue Print Pty Ltd, and in each of the last few years James Green has received 85% of the distributions from the trust, with the balance going to his wife Jenny.
The company has a total value of $5m. James and Jenny jointly own several rental properties, with a total net value of $1m. The trust will control Blue Print (as it owns 60%), and James will control the trust (as he has received more than 40% of the distributions). James, the trust and the company will all be grouped when applying the net assets test. Ignoring the rental properties, but including other minor assets, James calculates that he has a net asset value of $5.2m.
Clearly, if James was forced to include the full value of the rental properties ($1m, the $6m limit would be breached, and the trust would not be able to use CGT concessions for a sale of its shares in Blue Print.
As Jenny’s assets are excluded from the test, however, only James’ 50% share of the rental properties ($500,000) is relevant, so that the net asset value would be $5.7m, and the CGT concessions would be available, significantly reducing the tax on the share sale.