Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 3 CGT small business provisions
Outline of Chapter
3.1 Certain amendments in Schedule 3 to this Bill will make minor amendments to the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997).
Background to the legislation
3.2 The streamlined small business CGT concessions were inserted into the ITAA 1997 by the New Business Tax System (Capital Gains Tax) Act 1999 . Since then, unintended consequences to those concessions have been identified.
3.3 These amendments give effect to the Government's intended policy and are consistent with the Government's streamlined small business CGT concessions implemented in 1999.
Summary of new law
3.4 These amendments will improve the operation of the small business CGT concessions by clarifying and ensuring the provisions concerning these concessions have the intended consequences.
3.5 Some of the amendments will provide greater access to the provisions, and are beneficial to taxpayers. Other amendments will clarify certain aspects of the application of the provisions.
Detailed explanation of new law
| What the provision does | What the amendment will do |
|---|---|
| Signposts provisions which disregard the 'market value substitution rule'. | Insert a reference to section 139-20 which was inadvertently omitted when the Note was amended on introduction of the small business CGT concessions amendments.
[Schedule 3, item 1, subsection 116-30(1)] |
| Identifies basic conditions that must be met before being able to access the small business concessions. |
Background
A requirement that must be satisfied before the small business CGT concessions in Division 152 can apply to a capital gain is that the asset the capital gain relates to must be yours . While it is the intention to allow the concessions in Division 152 to apply to intangible assets, such as restrictive covenants, this requirement prevents this result because they are created in the other entity without being owned by the entity making the gain. Enable intangible assets (such as restrictive covenants and other rights that are created in another entity) that are inherently connected with an entity's business to satisfy the ownership and active asset tests. [Schedule 3, items 2, 3 and 5, section 152-12 and paragraphs 152-10(1)(a) and (d)] Example 3.1 Bryan is a sole trader who operates a butchery business. He has agreed to sell the assets of his business to Fred's Meats. As part of the agreement Bryan undertakes not to operate a butchery business within 5 kilometres of the current business. In return for this undertaking Fred's Meats pays Bryan an amount of $10,000. The $10,000 is a capital gain arising from CGT event D1 as Bryan creates a right, being a restrictive covenant, in Fred's Meats. This right qualifies as an active asset because it is inherently connected with other CGT assets of Bryan's that satisfy the active asset test. |
| Excludes the small business concessions, except roll-over relief, from applying to CGT events J2 and J3 (these events crystallise a gain previously disregarded when circumstances change). | Allow capital gains rolled over under the roll-over relief in Subdivision 152-E to become exempt when the small business retirement exemption conditions in Subdivision 152-D are met.
[Schedule 3, item 4, subsection 152-10(4)] |
| Includes in the $5 million net asset test the net value of CGT assets of an entity's small business affiliate or of an entity connected with a small business affiliate. | Prevent assets that are assets of an entity connected with both the entity and the entity's small business affiliate from being included twice in the $5 million net asset test.
[Schedule 3, item 6, paragraph 152-15(a)(iii)] |
| Excludes particular assets from the small business $5 million net asset test. | Ensure that assets of an entity connected with a small business entity's affiliate are excluded from the net asset test if they are not used in carrying on a business of the entity.
Example 3.2 Ray and Pat (husband and wife) operate a dairy farm. Pat also wholly owns Rural Homes Cleaning Ltd that operates a home cleaning business in the local town. Ray has no involvement with this business. Ray sells his interest in the dairy farm and seeks to claim the small business CGT concessions. In applying the $5 million net asset test, Ray does not include the net assets of Rural Homes Cleaning Ltd. [Schedule 3, item 7, subsection 152-20(3)] |
| Describes the rules in determining the period an asset has been owned where it has been acquired to replace an asset that has been compulsorily acquired, lost or destroyed. | Change the heading to accurately reflect the provision.
[Schedule 3, items 8 and 9, subsections 152-45(1) and 152-115(1)] |
| Describes the requirements for payments to CGT concession stakeholders to be exempt if the small business 15-year exemption has applied. | Ensure that capital gains made by companies or trusts on pre-CGT active assets, held for at least 15 years, are exempt when distributed to CGT concession stakeholders.
[Schedule 3, item 10, subsection 152-125(1)] |
| Describes the requirements for the small business 50% reduction of capital gains made on small business active assets. | Ensure that capital gains eligible for the small business retirement exemption and/or roll-over relief do not need to be reduced under Subdivision 152-C prior to applying those concessions. This might increase the exempt component of the eligible termination payment ultimately paid to the employee.
[Schedule 3, item 11, section 152-220] |
| Describes the requirements for the small business retirement exemption. | Include money or property applied for the entity's benefit, rather than paid directly to the entity in calculating the amount of capital proceeds received for a CGT asset.
[Schedule 3, items 12 to 14, subsections 152-325(4) and (7) and paragraph 152-305(1)(b)] |
| Describes the small business roll-over relief rules where an individual who has obtained a roll-over dies. | Ensure that exceptions to the provisions that crystallise rolled over gains are taken into account.
[Schedule 3, item 15, section 152-425] |
Application and transitional provisions
3.6 The amendments will apply to CGT events that happen after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999. This is the commencement date of the small business CGT concessions contained in Division 152 of the ITAA 1997. [Schedule 3, items 16 and 17]