Small Business Entities and CGT Concessions

“Small business” is not one universal tax status. Australian tax law uses different turnover and asset thresholds for different concessions. The first task is therefore to identify the concession sought, then test the threshold and conditions for that concession.

1. Small business entity status and aggregated turnover

Subdivision 328-C of the ITAA 1997 provides the small business entity framework. A taxpayer generally needs to carry on a business and satisfy the relevant aggregated-turnover threshold. Aggregated turnover is wider than the taxpayer’s own turnover because it can include the annual turnovers of connected entities and affiliates. This prevents groups from fragmenting activities across entities simply to obtain concessions intended for genuinely smaller economic groups.

For many core SBE concessions the familiar threshold is aggregated turnover of less than $10 million, but other concessions use different thresholds. Current ATO materials should always be checked for the relevant income year.

2. Affiliates and connected entities

An affiliate is not merely a friend, relative or customer. The statutory concept looks to whether a person or entity acts, or could reasonably be expected to act, in accordance with the taxpayer’s directions or wishes, or in concert with the taxpayer, in relation to business affairs. Connected-entity rules focus on control. The practical consequence is that group structure, voting rights, distributions, ownership and real decision-making can all matter to aggregated turnover.

3. Simplified depreciation and current asset thresholds

Eligible businesses may access the simplified depreciation rules in Subdivision 328-D. Asset thresholds, instant asset write-off rules and temporary measures are date-sensitive. A professional answer must state the relevant income year and verify the current threshold before calculating. Assets above the immediate-write-off threshold can enter the small business pool if the statutory conditions are met.

4. Simplified trading stock

Eligible businesses can access a simplified trading-stock concession where the difference between opening stock and a reasonable estimate of closing stock is no more than the statutory threshold. The concession is a compliance simplification, not permission to ignore stock where the statutory conditions are not met.

5. Division 152 — the gateway before the concessions

The small business CGT concessions are found in Division 152. Before discussing the 15-year exemption, 50% active-asset reduction, retirement exemption or small business rollover, the taxpayer must satisfy the basic conditions. The tests include the relevant CGT event and gain, one of the small-business/net-asset gateways, and the active-asset test. Additional conditions can apply to shares or trust interests.

The turnover gateway for the Division 152 concessions remains materially lower than the general SBE threshold. Alternatively, the maximum net asset value test can provide access where the statutory net value of CGT assets of the taxpayer and relevant connected/affiliate entities does not exceed the applicable $6 million limit.

6. The active asset test

An asset generally needs to be used, or held ready for use, in the course of carrying on a business, or be an eligible intangible inherently connected with a business. Passive investment assets can be excluded. The required period depends on how long the asset has been owned. Students should identify the ownership period, business-use period and any excluded use rather than simply labelling an asset “business property”.

7. The four principal CGT concessions

8. Small business restructure rollover

Subdivision 328-G can allow eligible small businesses to transfer active assets between entities without immediate income-tax consequences where the transfer is part of a genuine restructure of an ongoing business and ultimate economic ownership is maintained, subject to the statutory conditions. It is not a general “change entities tax-free” rule. Commercial continuity, ownership, asset character, residency and integrity conditions must be tested.

9. The professional method

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