The legislation increasing access to small business tax concessions has finally been passed. This article highlights the more significant changes - which have been many months in the pipeline. Some of the changes take effect from 12 months ago.
Anna Tang and Paul Ellis
Threshold tests eased
The key changes are those made to the various threshold tests which determine whether a business qualifies for the concessions. Of these, the most significant changes - which take effect from 12 months ago, 1 July 2006 - are:
- Significant individual test - from 1 July 2006, the threshold '50% controlling individual test' is replaced by the '20% significant individual test'. This new test allows individual taxpayers to qualify as small businesses (and so to access the Division 152 concessions) if they hold at least a 20% interest in the company or trust conducting the small business. They can hold that interest either directly or through one or more entities.
- CGT maximum net asset value test - from 1 July 2006, the threshold maximum net asset value test (which determines whether a business is a small business, and therefore eligible for the concessions) changes to increase the number of matters taken into account in determining a taxpayer's net assets. For example, taxpayers can take into account negative net asset values of connected entities. The maximum net assets threshold will also be increased to $6m under the Small Business Act (this is discussed below).
- Active asset test - from 1 July 2006, the 'active assets test' (which determines which assets qualify for CGT concessions) changes to increase the types of assets that can qualify as active assets and therefore be the subject of a small business CGT roll-over under Subdivision 152-E.
Easier access to rollovers and increased options
The following changes have made it easier to access small business benefits:
- Retirement exemption - the retirement exemption under Subdivision 152-D changes. From 1 July 2006, an individual, who was under 55 at the time they chose to access the retirement exemption in relation to a capital payment, is no longer required to roll the payment into super when the payment is received. Instead, they can receive the payment in their own name. Also, from 1 July 2006, those payments can be made in the form of assets instead of cash only.
- Small business roll-over - from 1 July 2006, taxpayers have greater choice in relation to rolling-over capital gains. In particular a taxpayer:
- can now roll-over part of a capital gain.
- can access roll-overs even when they chose to use capital gains to make repairs to existing assets instead of purchasing new assets.
- can roll-over a capital gain before they acquire a new asset or make a capital improvement (as long as they do so within 2 years after making the gain).
Deceased estates can access small business benefits
From 1 July 2006, a legal personal representative of a deceased person can access the small business concessions for the benefit of the estate of a person who, if alive, would have been able to access the concessions.
Broader definition of small business
The Small Business Act implements the Federal Government's 'New Small Business Framework'. It took effect from 1 July 2007, subject to the Act receiving the Royal Assent.
The most important changes relate to the small business test which must be satisfied for a business to be eligible for the small business tax concessions. A business will pass the small business test if it carries on a business and has aggregated turnover of less than $2m (an increase from the previous maximum of $1m).
Also, the $3m depreciating assets test for a business to qualify for the small business concessions no longer applies.
Tests and allowances eased
The other changes effected by the Small Business Act are:
- CGT maximum net assets test - from 1 July 2007 the CGT maximum net assets threshold increased from $5m to $6m, meaning that more taxpayers will qualify for the small business tax concessions in Division 152.
- Uniform capital allowance system - the roll-over relief available under the uniform capital allowance system is extended from 1 July 2007 to small businesses which make deductions for depreciating assets. Depreciating assets:
- with lives of 25 years or more, must be placed in a small business pool with a 5% depreciation rate, and
- with a lesser life, must be placed in a general small business pool with a 30% depreciation rate.
- Simplified tax system turnover threshold - from 1 July 2007 the simplified tax system turnover threshold and the GST cash accounting turnover threshold both increased from $1m to $2m.
Legislation to change the small business tax concessions regime in Division 152 of the Income Tax Assessment Act 1997 (ITAA97) has been passed as follows:
- The Tax Laws Amendment (2006 Measures No 7) Act 2007 (No 7 Act) received Royal Assent on 12 April 2007. They took effect for the 2006-07 tax year form 1 July 2006.
- The Tax Laws Amendment Act (Small Business) Act 2007 (Small Business Act) passed the Senate on 13 June 2007, and awaits Royal Assent. The changes generally took effect from 1 July 2007.
If you would like more information concerning the small business tax concessions or tax matters generally, please contact Maddocks on 03 9288 0555 and ask for a member of the Maddocks Tax & Revenue Team.