The Federal Government have sought to head off the adverse media response and complaints by small business following the Federal Budget by making additional unscheduled changes to the small Business CGT concessions.

The small business CGT concessions have been in place since 1999 and provide the following concessions:

• the 15-year reduction (exempts a gain);
• the 50% active asset reduction (reduces the amount of a taxable gain);
• the retirement exemption (exempts a gain capped at $500,000); and
• the roll-over concession (defers a gain).

Access to these concessions is broadly subject to satisfying a net asset test of $6m or a turnover test.  The turnover threshold has been the same since the introduction of the concessions in 1999.

The Government announcement late last week flagged an increase in the turnover threshold, a welcome change given it has been in place for over 25 years.  The devil, is however, in the detail.

The guidance emerging from the government is that it is proposing to increase the turnover threshold to $10m, however, contrary to the initial comments, this appears to be only for the 50% active asset reduction.  Whilst this is helpful, it creates additional complexity for an already complex area of law that should be straight forward for small business to apply.

The proposed change does not assist in extracting the gain from a company where a business has been sold.  Utilising the active asset reduction without being able to use the retirement exemption, means that whilst a gain may be reduced at the company level, all of this may be clawed back when the gain is extracted from the company by payment of a dividend.

The lack of an increase in the turnover threshold for all of the concessions, seems somewhat misaligned with the reality of what is now a small business.  This is especially the case given the other definitions contained within the tax laws of a small business, noting that the $2m has not been indexed or increased to take account for inflation.

The proposed start date for the changes is 1 July 2027 with legislation to be introduced into Parliament in the next two weeks.  This should provide further clarity on how the Federal Government propose to address the issues raised following the Federal Budget.

We will continue to provide further updates as announcements are made or Legislation is introduced. As always – if you’d like to know how these changes will affect your individual circumstances, please reach out to your ESV Engagement Partner.