Overview of the basic conditions to access the Small Business CGT Concessions. Go to Episode 2 - Specific Conditions.

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TRANSCRIPT

You own a small accounting practice and you run it through a company. After years of blood, sweat, and tears building your business, you decide to sell your business. That is you just sold the shares. And you made a capital gain of 5 million bucks. And the tax on that is potentially around 25%. That's like $1.25m. Like you spent the last 30 years building a practice, blood, sweat, and tears, and the government wants to take a quarter of it.

But don't worry because you might qualify for the small business CGT concessions. It's the difference between paying around 1.25 million tax per normal or zero tax, if you qualify for the concessions. And this is where our journey begins. The journey of the small business CGT concessions. It's like a board game. You have this massive heavy backpack, which represents the capital gain. And you're carrying it across the desert. And the ultimate goal of the game is to drop off as much of the burden as possible in your backpack, before you get to the finishing line at the end of the desert. But you see, you can only drop off weight if you pass certain hurdles. And some hurdles will let you drop off more weight, sometimes even the entire burden. And some hurdles only allow you to drop off a little bit of the weight. So let's begin our journey together and see how much of the weight you can actually drop off before you reach the end of your dessert.

So the first few hurdles are all about whether you meet the basic conditions of the small business CGT concessions. It doesn't actually allow you to drop off any of the weight yet, but getting past these hurdles will allow you to continue on your journey to see if you can access the concessions where there are specific conditions that actually allow you to drop off the weight. So, if you don't pass these basic tests, you're basically stuck with a bag and you have to go to the finishing line with the entire load and pay CGT on the entire 5 million bucks.

2:13 - $2m aggregated turnover test

So the first hurdle in the basic conditions is that you must be a small business entity with less than $2 million in annual aggregated turnover.

So let's clarify one thing first, when I say you, I actually mean the taxpayer that is subject to the CGT event. Sometimes the taxpayer is actually a company that has disposed the CGT asset or the taxpayer could be a trust. But in your case, you are the taxpayer. That is you as an individual because you have to dispose the shares in your company and you had a CGT event occurred to you. It's important to clarify this because the aggregated turnover test will include the turnover of you and your connected entities and your affiliates. So back to our first hurdle, which is that you must have less than $2 million in aggregated turnover, which includes your connected entities and affiliates. And that's subject to an entire separate video, along with the timing of how to calculate the turnover. But let's say you cannot pass this hurdle because your business has a high turnover of around 3 million in a year.

3:25 - $6m MNAV

Fortunately, there is an alternate route and that alternate route has a different hurdle. Which is the maximum net asset value test. The maximum net asset value test is passed if the market value of your total assets is under $6 million. But of course it includes your assets and assets of your connected entities and your affiliates. And some things are carved out like your main residence and super. So we'll cover that off in another video.

So let's say you do pass the Maximum Net Asset Value test because your business has a high turnover and a low asset base, which is typical for our accounting practices.

4:06 - Active asset test

The third and last hurdle of the basic conditions is the active asset test. And very broadly you pass this test if the asset has been used in connection with carrying on a business.

But the rules require the asset to also have been used for a sufficient period of time. Very broadly, the asset must be active for at least half of the ownership period before you sell it. Unless you've owned it for more than 15 years. In which case it must be active for only at least seven and a half years.

4:36 - CGT concessions stakeholder rules

Also because you are disposing shares in a company, the rules require you to trace through the company and look at the actual assets owned by the company to make sure that they are also active assets. So the market value of the active assets of your company, must be more than 80% of the total assets in your company.

Your company was also being Australian residents. And say your company is an accounting practice, so all assets are using carrying on a business and it's an Australian resident. So you pass the active asset test.

But wait, there is one more hurdle in a basic condition. Because you are disposing shares in a company, they are other conditions where the CGT concessions stakeholder rules come into play. And we'll walk through this in a separate video. But basically they're all about ensuring that you as a taxpayer have sufficient skin in the game. That is you own a sufficient percentage of the company to show that you deserve the CGT concessions. And let's say you also pass this test.

And so now you can continue to the next phase of the game which is all about whether you meet the specific conditions of the four small businesses sessions which will allow you to drop off either all of the burden or some of the burden of that 5 million capital gain that you're carrying.

So I'll see you in the next episode and also explain what the heck is a camel doing there.

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