Capital Gains Tax Concessions Assignment Sample

• Subject Name : Taxation Law

Case Study: Edwin

Conditions for availing CGT Concessions

According to the small business entity, CGT Concessions rules[1], a small business is entitled to certain CGT concessions concerning the sale of an active asset by it. A business entity shall be regarded as a small business entity for these concessions only if its aggregate annual turnover including the turnover of its connected entities [2]is not more than $ 2 million. This is the first condition that must be tested to determine if an entity is eligible to claim small business entity CGT Concessions.

Other conditions

All of the following conditions must be satisfied:

• The asset must be an active asset [3]i.e., it must have been used by the business or kept ready for use by the business for a minimum of 7.5 years, if it was owned for over 15 years or a minimum of half of the test period, if it was owned for 15 years or less.
• The net assets owned by the small business entity should not exceed $ 6 million [4](this does not include personal assets of the assessee or the small business entity owner which are not used for income-producing activities)

Clarification on Connected Entities to Determine Aggregated Turnover

The rule for determining whether two entities are connected entities or not is that one of these two conditions provided below must be satisfied

• Either the small business entity controls another entity (40% or more voting power)
• The entity and any other entity are controlled by a third entity which has a common control over both the entities.

CGT Concessions that Are Available

If all the conditions described above are satisfied, then an entity is eligible to claim the following small business entity concessions:

15-year exemption [5]– This can only be claimed if the business has owned the asset for a continuous period of 15 years and the age of the assessee is at least 55 years or the assessee has retired or become permanently incapable of performing his business and other activities. No capital gain shall be applicable if these conditions are met.

50% active asset reduction- Under this concession, the assessee is entitled to get a 50 percent reduction in the capital gains related to an active asset.

Retirement exemption – under this concession, the capital gains related to an active asset are exempt from tax up to a limit of $500000 which can be claimed once during the entire lifetime.

Rollover – These concessions allow the business entity to defer some or all of their capital gain for 2 years or more.

Determination of Edwin’s Entitlement to Above Concessions

To determine whether Edwin can claim the above-mentioned CGT concessions in respect of capital gain made by him on sale of his consultancy practice, it will have to be tested that whether he fulfills the above conditions:

• As Edwin owns more than 40% shares in Edwin Pty Ltd, it shall be regarded as a connected entity for Edwin. Hence, the Aggregated Annual Turnover for Edwin would be equal to $ 2.05 million (1.85million + 0.2 million for EPL's turnover). As the aggregated turnover is more than $ 2 million, it cannot be considered a small business entity.
• Edwin’s practice is an active asset and has been owned by Edwin since July 2005.
• The value net assets owned by Edwin is equal to $2.4 million (calculations are provided below), which is less than $ 6 million

Conclusion:

Edwin is not entitled to claim small business CGT concessions as he does not qualify as a small business entity.

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