Tax concessions – Small business
A business that meets the $2m small business entity (SBE) turnover test, $6m market net asset value (MNAV) test and is in compliance with the active asset test is eligible for small business tax concessions.
Businesses that have fallen into this category have enjoyed the perception of being in a tax advantageous position with 50 per cent Capital Gains Tax discount concessions, 50 per cent Active Asset Concessions and up to $1m contributions into superannuation.
Over the last 12 months however the landscape has changed for small businesses. Legislative changes have been made and the Australian Taxation Office has reviewed its interpretive decisions and increased its audit activities significantly.
To be eligible for small business tax concessions there needs to be a ‘Capital Gains Tax Event’. If the small business has a Capital Gain, and meets the turnover, market net asset value and active asset tests, it is eligible.
Furthermore, the relevant small business entity test takes into account connected entities, including entities connected with the taxpayer and affiliates of the taxpayer. There are specific issues including the concept of ‘control’ in a company – whether it is at 40 per cent of the voting capital and dividend rights, or in the case of a fixed trust or partnership, 40 per cent of the income or capital rights.
In addition there are provisions relating to discretionary trusts which involve control of the trust. They include:
- Whether 40 per cent of the distributions are capital or income
- The definition that you are carrying on a ‘business’ and that your annual turnover is less than $2m in ordinary income derived through the ordinary course of business but excludes transactions connected with entities and GST.
As a result of significant legislative changes to partnerships, partners now also have direct access to the concessions.
The Australian Taxation Office 2009/2010 compliance program identified the following issues for small businesses:
- Incorrect application of small business CGT concessions including evidence of market values at the time of CGT event
- Evidence of ownership or assets
- Tracing ownership interest and distributions to establish connected/affiliated entities.
It is important that before you consider selling your business you speak to your Chartered Accountant to ensure that you have a proper plan in place and that all issues are considered carefully.
This is of particular importance when it comes to the eligibility criteria and documentation needed to support the application of the small business concessions.