Satisfying the requirements in Division 152 ITAA 1997
The Small Business CGT Concessions provide significant tax relief for eligible SMEs, so it is not surprising that advisers will go to considerable lengths to determine their clients’ eligibility.
What is surprising, however, is that many advisers and their clients overlook the basic requirements relating to the actual payment of “exempt amounts” to CGT Concession Stakeholders after the concessions are applied.
This failure can jeopardise the taxpayer’s ability to distribute the exempt amounts to CGT Concession Stakeholders in a tax effective manner.
In the case of the Retirement Exemption, the failure to make the appropriate elections or adhere to the payment requirements means that the concession is simply deemed not to have been applied at all.
15 Year Exemption – Subdivision 152-B ITAA 1997
Where a trust or company is eligible to apply the 15 Year Exemption the relevant capital gain is completely disregarded.
If a company wishes to ensure that the payment of the exempt amounts to CGT Concession Stakeholders is excluded from treatment as a dividend, the payment must be paid within two years of the relevant CGT Event.
The payment does not need to be made directly by the company or trust that incurred the gain – it may instead be made by an interposed entity. It is critical in any event that the payment be made “in relation to the exempt amount”, which is not met, for example, by paying the amounts in the form of wages or salary.
The clear risk in this scenario is that if the taxpayer simply forgets to make payment of the exempt amounts within the relevant two year period, the tax effectiveness of the distributions will be lost.
Case Study #1 – ABC Winds Up its Business
- ABC Pty Ltd intends to wind down its business affairs, and sells all of its business assets on 1 October 2010 which incurs a capital gain of $500,000.
- Following a review by ABC Pty Ltd’s accountant, Prudent Co, it is determined that the capital gain qualifies for the 15 Year Exemption in Subdivision 152-B ITAA 1997, and the capital gain is disregarded.
- Prudent Co credits the $500,000 amount to ABC Pty Ltd’s sole CGT Concessional Stakeholder, Martin, in the 2010/2011 financial statements. Martin is unsure of his future plans and so leaves the funds in ABC Pty Ltd.
- On 1 December 2014 – over four years since the sale of ABC’s assets – Martin decides to wind up the affairs of the company by undertaking a member’s voluntary liquidation. He transfers the $500,000 proceeds from ABC Pty Ltd to himself.
- On 1 November 2014, a liquidator is appointed and the liquidator’s distributions are made.
Potential Outcome – An Unfranked Dividend
As the payment was not made to Martin in respect of the exempt amount ($500,000) within two years of the CGT Event, subdivision 152-B ITAA 1997 cannot operate to exclude the $500,000 amount from treatment as a dividend.
The $500,000 payment to Martin will be treated by the Commissioner as an unfranked dividend, and Martin will incur a tax liability.
Retirement Exemption – Subdivision 152-D ITAA 1997
If a company or trust wishes to apply the Retirement Exemption, the timing and payment requirements must be carefully considered.
Elections for Retirement Exemption
In most CGT contexts, the way a taxpayer prepares their tax return provides sufficient evidence to the Commissioner of the making of a “choice”.
In the case of the Retirement Exemption, however, Subdivision 152-D ITAA 1997 requires that the choice be made in writing. The written choice must identify:
(a) The CGT exempt amounts; and
(b) The percentage of each CGT exempt amount that is attributable to each of those CGT Concession Stakeholders.
If a company or trust is making the choice and there is more than one CGT Concession Stakeholder, one or more of the percentages may be nil, but all of the percentages must add up to 100%.
It is important to note that the choice must be made by the relevant taxpayer who has incurred the capital gain – not the CGT Concession Stakeholders. If an effective written choice is not made, the Retirement Exemption will not be deemed to have been applied.
Case Study #2 – Exemption Denied
In Davies & Anor v FC of T 2009 ATC, the exemption was denied to husband and wife taxpayers who were beneficiaries of family trusts.
Whilst the taxpayers personally signed elections to apply the exemption to the capital gain from the sale of the properties, the AAT held that there was no evidence to show that the trustee of the trusts ever chose to apply the Retirement Exemption.
Payment of Exempt Amounts
Subdivision 152-D ITAA 1997 requires that payment of exempt amounts to the CGT Concession Stakeholders be made as follows:
- If a company or trust has disregarded a capital gain under the Retirement Exemption in respect of a J2, J5 or J6 CGT event, seven days after the company or trust makes the choice; otherwise
- The later of:
– seven days after the company or trust makes the choice; and
– seven days after the company or trust receives an amount of capital proceeds from the CGT event.
If the election and payment requirements of the Retirement Exemption are satisfied then the payments made by the taxpayer to CGT Concession Stakeholders:
- Will not be treated as a dividend; and
- Will be regarded as non-assessable non-exempt income in the hands of the CGT Concession Stakeholders or any interposed entities.
If the timing requirements of the payments are not observed, the Retirement Exemption will not be deemed to have been applied.
This may in turn lead to reduced planning opportunities for the taxpayer or adverse taxation consequences.
It’s about planning
The payment requirements in respect of the Small Business CGT Concessions are easily overlooked. If your client is eligible for relief, you must take care to ensure that any time-frames or payment requirements are considered.
It is good practice for taxpayers and their advisers to establish a plan and identify key dates if the Small Business CGT Concessions are to be applied.
If you have any questions about the Small Business CGT Concessions, or taxation matters generally, please feel free to contact us on 07 3223 6100 or email us at firstname.lastname@example.org.