Treasury to modify small business CGT concessions after proposed retrospective application left SME owners with surprise $500,000 tax bills
Tuesday, June 19, 2018/
The Australian Treasury has cancelled the retrospective application of a set of “integrity measures” for small business capital gains tax (CGT) concessions after an investigation by SmartCompany revealed SME owners would have been unknowingly slugged with massive tax bills after selling their businesses.
In May 2017, Treasury announced a number of integrity measures in the 2017-18 budget to ensure small business CGT concessions were being appropriately used by actual small business owners. These measures were outlined in budget papers as having the effect to “ensure that the concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business”, and were announced to come into effect prospectively from July 1, 2017.
However, draft legislation for the measures (Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018) was not released until February 8, 2018, and included a number of changes that significantly restrict small business CGT concessions, changes that were not alluded to in the 2017 budget.
These changes included new tests to determine if a CGT asset is “active”, and new requirements that SME owners must be carrying on a business before the CGT event, both implemented to stop taxpayers from inappropriately using small business CGT concessions to shield themselves from capital gains tax on other assets.
The final change introduced in the draft legislation was more significant. Previously, to be eligible for small business CGT concessions, the business owners themselves had to pass a modified $6m net asset value test, assessing if the net value of the shareholders’ and associated entities CGT assets was below $6 million.
However, the draft legislation introduced a totally new clause, where to qualify for the small business CGT concessions the business either had to qualify as a CGT small business entity (having a revenue of $2 million or less) or itself satisfy the $6 million net value asset test.
This meant to receive the CGT concessions, not only did the business owners have to have less than $6 million in assets, so did the company that was being sold. At the time, experts questioned if the change went beyond an “integrity measure” and towards a significant change in the law.
Retrospective application lands SMEs in hot water
The most alarming aspect of the legislation was the intention of Treasury to enact it retrospectively from July 1, 2017, meaning that any business owner who sold their business between May 2017 and February 2018 could have landed themselves with a massive tax bill – totally unknowingly and entirely beyond their control.
SmartCompany is aware of one business owner who – on advice from an expert set of tax lawyers – proceeded with the sale of their business late last year. The business owner was aware of the announced integrity measures, but at the time there was no indication of the change to the $6 million net asset test and its application to the business itself.
The business owner and their shareholders proceeded with the sale, with each shareholder satisfying the personal $6 million net asset test and each with no reason to believe they were ineligible for the small business CGT concessions.
On the reveal of Treasury’s draft legislation in February, the business owner found their sale was no longer eligible for the proposed retrospective changes as the business’ net assets exceeded the suddenly introduced $6 million threshold, and they had sold after the July 1, 2017 implementation date.
The business owner and their shareholders then faced a $500,000 tax bill and a significant hole in the only retirement fund they had. The business owners could not have known their business was ineligible at the time of selling, as at the time of selling, the new “integrity measures” had not been announced.
Scrutiny committee opposes changes
After the bill was introduced on March 28, it was analysed by the Senate Scrutiny Committee, who questioned Treasury as to why the bill was being implemented retrospectively, and requested details on “how many individuals will be detrimentally affected by the retrospective application of the legislation, and the extent of their detriment”.
“The committee reiterates its long-standing scrutiny concern that provisions that back-date commencement to the date of the announcement of the bill (i.e. ‘legislation by press release’) challenges a basic value of the rule of law that, in general, laws should only operate prospectively (not retrospectively),” the committee said.
Despite this, business owners affected by the changes told SmartCompany they had heard no progress on having the retrospective aspect of the bill nixed – despite reaching out to Treasury and Treasurer Scott Morrison multiple times – and feared the legislation would pass with no opposition to the harsh changes.
However, when questioned as to why the bill needed to be enacted retrospectively, and to the number of small business owners who would be negatively impacted by the implementation, Treasury told SmartCompany the bill would be amended to remove the clause.
“The Bill will be amended to have a start date of 8 February 2018, the date the draft legislation was released for consultation, providing a transition period between announcement and the date of effect,” a spokesperson said.
Treasury also stressed that “small business CGT concessions themselves are not changing”, rather were being “appropriately targeted”.
One small business owner, who would have been caught up in the retrospective changes, told SmartCompany the last few weeks were “a nightmare”.
“I was regretting selling. The decision by the Treasury to remove the retrospective element of this is a huge relief, as this would have been a half million dollar hit to my retirement plans,” they said.
The bill is set to be debated in parliament on Thursday.
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