Advanced guide to capital gains tax concessions for small business

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About this guide

This guide applies to capital gains tax (CGT) events that happened in the 2011-12 income year.

Do not use this guide for CGT events that happened in earlier years, as the information might have changed. See Capital gains tax (CGT) essentials for earlier versions of this guide.

This guide explains the CGT concessions available for small business that are contained in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997). These concessions apply to CGT events happening after 11.45am, by legal time in the Australian Capital Territory, on 21 September 1999.

This guide does not explain how the concessions apply to a consolidated group of entities.

In this guide, we use the word 'you' to refer to the taxpayer (or their agent) to which this guide applies, such as a sole trader, a partner of a partnership, a company or a trust that conduct a small business.

Changes in recent years

Changes to the CGT concessions for small business over recent years have improved access and made it easier for taxpayers to work out whether they are eligible for the concessions.

Tax Laws Amendment (2011 Measures No. 9) Act 2012, which received Royal Assent on 29 March 2012. The amendments generally apply in relation to CGT events happening in the 2006-07 income year and later income years. We will refer to these as the March 2012 amendments in this guide. The amendments involve the following changes to the calculation of an entity's small business participation percentage:

• the voting power calculation for joint owners of shares is removed
• an entity's small business participation percentage in a discretionary trust may be greater than zero, where the trust did not make a distribution during the CGT event year, because it had a tax loss or no net income for the relevant year.

As the March 2012 amendments are retrospective, taxpayers have additional time to amend their return to take advantage of the amendments where the original assessment was made before the commencement of these amendments (30 March 2012, the day after Royal Assent).

The taxpayer has until the later of:

• 2 years after the commencement of these amendments, or
• a later day allowed by the Commissioner of Taxation.

Other recent amendments are contained in Tax Laws Amendment (2009 Measures No. 2) Act 2009 , which received Royal Assent on 23 June 2009. We will refer to these as the June 2009 amendments.

This date is relevant later for the time limit for making choices.

The changes apply to:

• payments and CGT events happening on or after 23 June 2009
• CGT events happening in 2006-07 and 2007-08 and later income years.

These changes have been incorporated into this version of the guide. Information about the changes is also available in Capital gains tax (CGT) concessions for small business - more changes for the 2007-09 years .

The following amendments apply to payments and CGT events happening on or after 23 June 2009 and involve changes to:

• enable certain liabilities to reduce an entity's net asset value in applying the $6 million maximum net asset value test
• ensure all uses of an asset (except certain personal use and certain uses from which passive income is derived) are considered in determining what its main use is
• the operation of the retirement exemption to remove unintended consequences by
  • ensuring the retirement exemption caters for CGT-exempt payments flowing through small business structures involving interposed entities
  • excluding small business retirement exemption payments made to CGT-concession stakeholders from the deemed dividend provisions of section 109 and Division 7A section 109C of the Income Tax Assessment Act 1936 .

The following amendments were announced in the 2008-09 Budget and apply to CGT events happening in 2007-08 and later income years. The changes increase access to the CGT concessions for small businesses with turnover less than $2 million via the small business entity test for:

• taxpayers owning a CGT asset used in a business by an affiliate or connected entity (passively-held assets)
• partners owning a CGT asset used in the partnership business (partner's assets).

Other minor changes improve the operation of the concessions by:

• increasing the circumstances and purposes for which a spouse or child under 18 years is taken to be an individual's affiliate
• removing unintended consequences for the retirement exemption by correcting the treatment of capital proceeds received in instalments.

The following changes apply retrospectively for CGT events happening in 2006-07 and later income years to:

• increase access to the concessions for joint tenants and trustees of testamentary trusts where a gain arises from an asset within two years of the death of the deceased, where the deceased would have been entitled
• remove the requirement in the retirement exemption to meet the basic conditions, where the replacement asset conditions have not been met for the small business rollover (CGT events J5 and J6).

As the 2006-07 and 2007-08 changes are retrospective, taxpayers have additional time to make their choice to use the concessions where they become eligible as a result of these June 2009 amendments. The extension of time to make a choice applies to CGT events happening before 23 June 2009.

The taxpayer has until the later of:

• the day the entity lodges its tax return for the income year in which the relevant CGT event happened
• 12 months after the day on which these amendments receive Royal Assent, or
• a later day allowed by the Commissioner of Taxation.

For more information see: Capital gains tax (CGT) concessions for small business - more changes for the 2007-09 years Comparison of changes to small business CGT concessions since 2006 .

ATO references:
NO NAT 3359