Potential tax free gains to business owners

The Federal Government has recently announced significant changes to the Small Business CGT Concessions. The changes are most welcome, opening up access to the concessions far beyond the circumstances and legal structures to which they were previously limited. These changes now mean that, under the right circumstances, small business owners need not pay any CGT on the sale of their business.

Significant individual

One of the most significant changes is the replacement of the Controlling Individual concept with a new 20% Significant Individual Test. The Controlling Individual Test was applied to an individual who directly held at least 50% of the ownership interest in a company or unit trust. It was used to determine whether an individual could access the concessions on the disposal of active shares.

Under the new 20% Significant Individual Test, it is now possible to trace interests in a company or trust through one or more interposed entities via a concept known as the small business participation percentage (SBPP). Where an individual has at least a 20% SBPP in an entity, the individual will be recognised as a significant individual in relation to the entity.

This extends the availability of the concessions to a greater number of CGT concession holders and their CGT affiliates.

It has also expanded the number of various legal structures that business can operate through without falling foul of the eligibility criteria for access to the concessions.

90% Stake Test

This new test overcomes one of the previous impediments to accessing the concessions. When active shares were disposed of, access to the concessions was only possible where a controlling individual held those shares directly. The new test provides that an entity can still access the concessions on disposal of shares where the entity is not an individual. This is provided that significant individuals (or their spouses) have at least a 90% stake in the entity disposing of the shares.

Other changes to the concessions make this a very complex area. However, the implications for business owners are significant.

Act now

The key to maximising the available benefits is to plan ahead. It is crucial that the right business structure is in place. Talk to us now about how you can benefit from these new concessions and how you may be able to take your profit on sale of your business tax free.

Published : 15 March 2007