Are you looking to expand your knowledge of the Small Business Capital Gains Tax Concessions (SBCGT)?
With changes that have been legislated in both the taxation and superannuation environments over the last ten years, the types of structures and how we have traditionally used them for our clients is also changing.
These questions were asked at this year’s TAG Superannuation Strategies Seminar by accountants who want to grow their knowledge of this topic and have been answered by our superannuation experts.
Dive in and get your SBCGT questions answered!
When can you use the indexed lifetime cap amount compared to the $500k lifetime cap amount?
When making a superannuation contribution following applying one of the Small Business Capital Gains Tax (SBCGT) concessions, which CGT cap amount you utilise will depend on which of the exemptions you are applying. To utilise the indexed lifetime cap amount ($1.78m for the 2024/25 financial year), you need to meet the conditions of the 15-year CGT exemption. As this is the most valuable of the concessions (in that it will entirely wipe out the capital gain), there are additional conditions required to be met over and above the basic conditions). The $500k CGT cap amount is utilised when applying the CGT retirement exemption.
Why would you choose not to apply the 50% active asset exemption?
When looking at applying the concessions, minimising tax is not the only benefit. There is also the ability to make contributions to superannuation, which can be part of your client’s wealth creation strategies. If electing to use the retirement exemption so that a superannuation contribution can be made, it is worth considering not applying the 50% active asset exemption, as this will potentially allow for a greater superannuation contribution, that does not count towards the non-concessional limits.
Where there is an internal restructure (i.e. shares or business is not being sold to an independent third party), how is the restructure funded?
Where there is an internal restructure (commonly done for asset protection purposes), it is common for no cash to be exchanged. Generally, the way this will be treated in these instances is a loan will be created in the selling entity. The benefit of this is that as cash from profits is generated, these amounts can be used to repay loan accounts rather than being treated as dividends.
What happens if the directors of the holding company want to sell the shares in the holding company to a third party?
For many of our clients, their structure has included a family trust, which has run the business. This type of structure has served our clients well in that it has provided asset protection to a degree, as well as flexibility to whom distributions are paid.
One reason for wanting to restructure is the ability to grow the trading company into the future, with the potential of being able to bring in additional shareholders (succession planning with key personnel) or sell to a third party.
One benefit of transferring the business out of the family trust into a company, and having the family trust or an interposed holding company as the shareholder, is that it simplifies the ability to on-sell those shares of the trading company at a later point in time. In addition to the ease of selling some of the shares, when the restructure was undertaken, a new cost base would have been created for the shares, potentially minimising capital gains that apply at that time of sale.
If we restructure and incorporate a holding company, will the income of that company be taxed at 25% or 30%?
The answer to this depends on the income received by the holding company. One of the criteria for the base rate of 25% to apply is that no more than 80% of the income in the company can be derived from passive income. Accordingly, if the holding company holds shares in the trading company, and the trading company pays a dividend to the holding company and this dividend represents more than 20% of the income received by the holding company, then the base rate will apply. If it represents less than 20% of the income, then the 30% tax rate will be required to be paid by the holding company.
Should the director of the holding company be the “non-risk” spouse?
Whilst careful consideration should always be given to who the director of the holding company is (particularly depending on what other assets are owned by the holding company), in most instances, it is not going to matter who acts as director. There should be little or no risk associated with being the director of the holding company. Where a holding company is utilised and owned by a family trust, there should be minimal risk to the retained earnings in the holding company. If the holding company director is sued, the assets should still be safe.
Are there other CGT rollover provisions that can apply, other than the SBCGT concessions?
Other CGT rollover provisions can apply, other than the SBCGT concessions. Each of these rollover provisions have very specific criteria required to be met for the provision to apply. TAG can assist with determining whether the provisions would apply in your clients’ circumstances and with all components associated with restructuring.
Are the SBCGT concessions available to companies and trusts?
The SBCGT concessions are available to the selling entity, whether that entity is a company or a trust. Different requirements apply depending on whether it is a company or a trust. Again, TAG can assist you with navigating these requirements for your clients.
Want to learn more?
If you have any further questions or wish to discuss your client’s circumstances, don’t hesitate to reach out to us! Email us at super@tagfinancial.com.au or give us a call on 03 9886 0800.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2024. Please do not reproduce without the expressed written consent of the author.