Tax & ATO News Australia

Retrospective Changes to Small Business Concessions

 My last rant measured expression of my opinion was only one small voice amongst many people criticising the Federal Opposition attach on franking credit refunds. Now it is time to show I have no political bias and turn the same criticism on the Federal Government for their proposed small business changes, which are arguably far worse, particular for individual small business owners who have just sold their business, or are about to do so.


Every so often something arises that has a less obvious impact but potentially poses far greater damage for individuals. That is currently demonstrated as the proposed changes to small business concessions which were announced in February.


The issue is that for a number of years various generous concessions for selling small businesses have been available as compensation for business owners not having been able to save for their retirement. To qualify (and this is grossly over-simplifying) they must have net assets of less than $6mil or turnover under $2mil.


In May 2017 the govt announced it would be cracking down on aggressive strategies with an integrity measure to ensure the small business concessions were appropriately applied. However, the February 2018 draft legislation proposed retrospective measures that went far beyond the scope of the previous announcement. These issues will affect future and past business sales in ways no ever realised and we sincerely hope it won’t become legislation. The restrospectivity of these changes means that they operate for businesses that were sold after 1 July 2017 – some 9 months before the legislation was drafted.


The proposed legislation includes 4 new criteria to be satisfied, the draft legislation repeals s 152-10(2) of the Income Tax Assessment Act 1997 (the ITAA 1997). In substitution, it inserts a new s 152-10(2). The conditions of the new subsection are:

 

  1. a stricter active asset test
  2. if a taxpayer relies on the CGT small business entity test to qualify for the SB concessions, they must be carrying on a business just before the relevant CGT event
  3. the company or trust in which the shares or units are being sold (the object entity) must be carrying on a business just before the CGT event, and
  4. the object entity must itself either satisfy the CGT small business entity test or a modified $6m maximum net asset value test.


Whilst some of the changes are sensible, such as preventing a person from using the small business concessions to shield a capital gain on shares or units by becoming a CGT small business entity (ie by starting a new, unrelated business) later in that income year. Others are very concerning, in particular the changes that will have retrospective application to periods prior to 1 July 2017, by virtue of the application of the modified active asset test (which looks back at the history of ownership of the relevant shares or units).


In circumstances where the ATO can, and has, applied Part IVA to the real mischief that this proposed legislation targets, it really is unclear why it was needed, and why it went so far, and why it applies retrospectively.


Both Vincees of Government must do better than this. It leads to far too much uncertainty and a serious lack of confidence.

 


 

Posted in: Tax & ATO News Australia at 20 March 18

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Tax & ATO News Australia

Author: David Hughes

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