Question:
Could I have your thoughts/comments on my client’s position? He has sold all his shares to another Company that will assume the running of the business in which he and 2 others were the operators/employees/directors. They have also sold all their shares, like my client.
My client’s shares sold [600,000 units] were acquired [for $900] upon incorporation some 10 years ago and were sold for $450,000 per a Contract dated 30 June 2021.
The purchaser of the shares required payment to be over three instalments – one early July 2021 [$240,000]with the others on 30 June 2022 [$105,000]and 30 June 2023 [$105,000].
I can add that the small business aggregated turnover is less than $2 million and that the net assets do not exceed $6 million. And furthermore, the 15-year exemption does not apply, with the shares bought when the Company started some 10 years ago.
I am not familiar with cases like these, but I understand I should be reviewing certain Tax Concessions like Sale of Business as well as Active Asset Provisions, Small Business Retirement Exemption as well as Capital Gains Tax.
Also, I rang the ATO, who quickly questioned whether shares were active assets or not.
Are you able to elucidate on why the ATO asked me this, please?
Answer
Of key importance here is meeting the eligibility conditions common to all 4 small business CGT concessions.
The ATO wanted to establish whether the shares were “active assets” – they clearly are if they are shares in a company that actively conducted a business.
Next, if we confirm that your client as an individual owns the shares. it is necessary to establish if he is a “significant individual.”
Broadly this means owning 20% or more of the Company.
As you mentioned previously as being the case, your client must be either be a small business entity with an aggregated turnover of less than $2 million or meet the maximum net asset value test of $6 million.
As your client is selling shares in a company, they must meet further conditions:
- You either:
- carried on a business just before the CGT event
- meet the maximum net asset value test
- Just before the CGT event, either:
- you were a CGT concession stakeholder in the Company or trust
- the CGT concession stakeholders in the Company or trust had a total small business participation percentage of at least 90% (the 90% test) in you.
- The Company or trust, when applying the modified connected entity rule in determining entities controlled by it, must either:
- be a small business entity for the income year
- meet the maximum net asset value test.
- Your shares or interest must meet the modified active asset test.
The four business CGT exemptions are:
- Small business 15-year exemption
- Small business 50% active asset reduction
- Small business retirement exemption
- Small business rollover
A capital gain can potentially be reduced to zero by applying multiple small business CGT concessions. Care needs to be taken in applying the concessions in the correct order along with any capital losses and the general CGT discount.
Applying the concessions in the correct order, in this case, would mean:
- Active asset 50% discount
- Individual 50% discount on the above balance
- The remaining 25% could be dealt with by the retirement concession
If your client is less than 55, then this means 25% of the taxable capital gain needs to be placed in a complying superannuation fund to get the retirement concession.
There is no superannuation tax on this contribution.
If over 55, your client can choose whether he places the funds in super to access the concession.
As the retirement concession is limited to $500k per lifetime, it is important to access all available concessions in the “right order” to preserve this concession.