The small business CGT concessions measure was announced in the budget, as part of the ‘tax integrity’ package of reforms.
The government is now proposing that, from 1 July 2017, the small business CGT concessions are only be accessed in relation to assets used in a small business, or ownership interests in a small business.
“This is an integrity rule designed to prevent taxpayers from accessing these concessions for assets which are unrelated to their small business, such as by arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions,” federal Treasurer Scott Morrison said in a statement yesterday.
Mr Morrison is touting the changes as fairness measures, but tax partner at BDO, Mark Molesworth, believes the measures will adversely impact those with legitimate and simple arrangements.
“The proposed provisions will significantly reduce the circumstances in which taxpayers can claim the small business CGT concessions,” Mr Molesworth told Accountants Daily.
“While these are badged as integrity measures, the proposed law does more than just limit abusive arrangements — it removes the concessions from ‘plain vanilla’ circumstances that were clearly meant to be captured by the existing provisions,” he said.
Mr Molesworth believes the changes will, in effect, be retrospective.
“The drastic increase in scope, which was not flagged in the budget announcements, means that the proposed provisions are retrospective and will adversely affect taxpayers who have sold shares in companies or interests in trusts since 1 July 2017 in reliance on the existing law and the plain meaning of the budget announcement,” he said.
“Either the legislation needs to be better targeted, or the government needs to justify the reduction in scope of the concessions,” he said.
Mr Molesworth supplied examples of situations where previously eligible clients would now be ineligible for the concessions:
· Mum, dad and daughter each own one-third of the shares in MDD Pty Ltd. MDD runs an engineering business turning over $8 million per year. Mum, dad and daughter agree to sell their shares for a total of $7 million (ie $2.3 million each).
· Zed Unit Trust is 100 per cent owned by Jenny. Zed Unit Trust owns a small commercial tenancy which is leased to Why Pty Ltd. Jenny also owns 100 per cent of the shares in Why Pty Ltd. Zed Unit Trust is not considered to carry on a business because its leasing activities are small scale. Jenny sells all of the shares in Zed Unit Trust and all of the shares in Why Pty Ltd for a total of $1 million. The existing concessions would apply to the entire transaction. Under the proposed law, the concessions would be available for the sale of the shares, but not the sale of the units.