CGT, Small Business Concessions and the Family Trust

The small business CGT concessions in Div 152 ITAA 1997 require the basic conditions to be met: (1) the asset is a CGT asset used in a small business, or an interest in a small business; (2) the taxpayer is a small business entity (turnover under AUD 2 million) or the asset's maximum net asset value does not exceed AUD 6 million (the $6 million net asset value test); (3) the asset is an active asset; (4) if the asset is a share or trust interest, there are additional conditions. The trust's aggregated turnover is AUD 3 million, so it is not a small business entity. However, the net asset value test may be met: the trust's net assets are AUD 4 million, which is below the AUD 6 million threshold. But we must include the net assets of related entities and affiliates. Assuming no related entities, the test is met. The premises and goodwill are active assets because they are used in the business. The goodwill is an active asset. The premises are active if used in the business. The trust is a resident trust? The trust is a discretionary trust, and the trustee is the taxpayer. The basic conditions are met if the trust is a small business entity or meets the net asset value test. The trust meets the net asset value test (AUD 4 million < AUD 6 million). The assets are active. So the basic conditions are met. The concessions available: (a) 15-year exemption: if the trust has owned the asset for 15 years and the individual who is the significant individual is 55 or over and retiring, or permanently incapacitated. The trust has owned the premises for 14 years (2010 to 2024), so not 15 years. Goodwill may have been owned for 15 years? The business has been operating for 15 years, but the goodwill may have been acquired over time. The 15-year exemption requires ownership for 15 years. Not available for the premises if only 14 years. (b) 50% active asset reduction: available if the basic conditions are met, reduces the capital gain by 50%. (c) Retirement exemption: up to AUD 500,000 lifetime limit, available if the individual is retiring or 55 or over. The trustee can choose to apply the retirement exemption to the gain, but the amount must be paid to the individual or used for retirement. (d) Rollover: available if the proceeds are used to acquire replacement assets or make improvements. The trustee can choose to apply the concessions in order: first the 50% reduction, then the retirement exemption, then rollover. The capital gain on the premises: cost base AUD 800,000, sale price AUD 2.5 million, gain AUD 1.7 million. Goodwill: cost base nil? Assume cost base zero, sale price AUD 500,000, gain AUD 500,000. Total gain AUD 2.2 million. Apply 50% reduction: gain reduced to AUD 1.1 million. Then retirement exemption: up to AUD 500,000, leaving AUD 600,000. Then rollover if applicable. The 15-year exemption is not available because the premises have not been owned for 15 years. However, if the trust has owned the business for 15 years, the goodwill may qualify for the 15-year exemption if the significant individual is 55 or over and retiring. The trustee should consider the significant individual's age and retirement status. The trust also has a capital gain of AUD 100,000 from shares, which is not an active asset, so the small business concessions do not apply to that gain. The trust can distribute the gain to beneficiaries, but the concessions are applied at the trust level. The trustee must consider the non-resident beneficiary Linh: the small business concessions may not be available to non-residents for certain assets? The CGT concessions are available to non-residents if the asset is taxable Australian property. The premises and goodwill are taxable Australian property, so the concessions may apply, but the retirement exemption requires the individual to be an Australian resident? The retirement exemption is available to individuals who are Australian residents? The conditions in s 152-305 require the individual to be an Australian resident? Actually the retirement exemption requires the individual to be 55 or over and retiring, or permanently incapacitated. It does not explicitly require residency, but the payment must be made to the individual. The trustee should be careful. The corporate beneficiary: distributing the capital gain to a company may not be beneficial because the company cannot use the small business CGT concessions? The concessions are applied at the trust level before distribution, so the trust can apply the concessions and then distribute the gain. However, if the gain is distributed to a company, the company may not be able to use the concessions. The trustee should consider streaming the gain to individual beneficiaries who can use the concessions. The 50% reduction is applied at the trust level, so the trust can reduce the gain and then distribute. The retirement exemption requires the individual to receive the payment. The trustee should also consider the non-resident beneficiary: non-residents are subject to CGT on taxable Australian property, and the concessions may apply, but the retirement exemption may not be available if the individual is not an Australian resident. The trustee should seek advice on the specific circumstances. The capital gain on the shares is not eligible for the small business concessions because the shares are not active assets. The trust can distribute the gain to beneficiaries, but the non-resident beneficiary may be subject to withholding tax? The trust should consider the CGT consequences for the beneficiaries. The trustee's plan to distribute to the corporate beneficiary and then pay dividends may attract Div 7A or other anti-avoidance rules. The trustee should consider the overall tax effect.

If the trustee distributes the capital gain to Nguyen Pty Ltd, the company will include the gain in its assessable income and pay tax at 25% (or 30% if not a base rate entity). The trust can stream the capital gain to the company under the trust streaming rules, provided the company is a beneficiary and the trust deed allows. The company can then pay dividends to the individual beneficiaries. However, the Commissioner may apply the general anti-avoidance provisions in Part IVA if the arrangement is entered into for the dominant purpose of obtaining a tax benefit. The arrangement of distributing capital gains to a corporate beneficiary to take advantage of the lower company tax rate, and then paying dividends to individuals, may be seen as a scheme to reduce tax. The Commissioner has been active in this area, and there are specific integrity measures. For example, Div 7A applies to payments, loans or forgiven debts by a private company to its shareholders or associates. If the company pays dividends, Div 7A does not apply, but the dividends are assessable to the individuals with franking credits. The individuals may be better off receiving the gain directly if they can use the small business CGT concessions. The trust can apply the concessions before distributing the gain, so the gain distributed to the company may be reduced. However, the company cannot use the retirement exemption or the 15-year exemption because those require an individual. The 50% reduction can be applied at the trust level, so the company receives a reduced gain. The company then pays tax on the reduced gain. If the gain is distributed to individual beneficiaries, they may be able to use the retirement exemption if they are 55 or over and retiring. The non-resident beneficiary Linh: if the gain is distributed to her, she may be subject to CGT on taxable Australian property. The trust should consider whether the gain is attributable to taxable Australian property. The premises and goodwill are taxable Australian property, so the gain is subject to CGT for non-residents. However, the small business concessions may not be available to non-residents for the retirement exemption? The retirement exemption requires the individual to be an Australian resident? The legislation does not explicitly require residency, but the payment must be made to the individual. The trustee should consider the tax treaty. The distribution to the corporate beneficiary may also trigger the deemed dividend rules if the company is a beneficiary and the trust distributes to it. The trustee should consider the trust loss rules and the streaming rules. The best approach may be to distribute the gain to individual beneficiaries who can use the concessions, and to avoid the corporate beneficiary if the arrangement is solely for tax avoidance. The trustee should also consider the 50% reduction and the retirement exemption. The capital gain on the shares can be distributed to the individuals, but the non-resident beneficiary may be subject to withholding tax on the dividend? The trust should consider the overall tax outcome. The Commissioner may apply s 100A ITAA 1936 if the trust distributes income to a beneficiary under a reimbursement agreement. If the corporate beneficiary is used to reduce tax, s 100A may apply. The trustee should be cautious. The arrangement may also attract the diverted profits tax or the multinational anti-avoidance law if the company is foreign, but it is a resident company. The trustee should seek a private ruling.