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Changes to the CGT concessions for small business - 2006/07 year

The legislation bringing in a raft of changes to the small business CGT concessions, announced in last year's Budget, is now law.

These changes apply from 1 July 2006, and should make it easier for many small businesses to access these generous concessions.

Editor. If a small business taxpayer disposes of a business asset, including goodwill, and is able to use the small business CGT concessions, it can potentially reduce the capital gain to nil!

The small business CGT concessions are:

  • the 50% active asset reduction (which can be used in addition to the 50% discount for individuals and trusts, to effectively reduce a capital gain by 75%);
  • the 15-year exemption (which can entirely exempt a gain on an asset held for at least 15 years from CGT);
  • the retirement exemption (which can be used to exempt up to $500,000 worth of capital gains over the life of an individual from CGT); and
  • the small business active asset rollover (which allows a taxpayer to defer paying CGT on a capital gain now, by rolling the gain over into a replacement asset).

The new changes to the small business CGT concessions include:

  • making it easier for small businesses to access the concessions, by making it easier to meet the $5 million net asset value test;
  • for partners of partnerships, applying the $5 million net asset value test to the value of assets of the individual partners rather than to the partnership as a whole;
  •  making it easier for companies and trusts to access certain concessions (e.g., the retirement exemption and the 15-year exemption), by replacing the requirement for there to be an individual with a 50% interest in the entity with a requirement that there be an individual with a 20% interest;
  • allowing a person to gift a business asset and still access the retirement exemption, rather than requiring the asset to be sold;
  • removing the requirement that an asset be 'active' (i.e., a business asset) immediately before it was sold (meaning that the concessions will now simply be available for an asset which was active for the lesser of half of its life, or 7.5 years); and
  • allowing legal personal representatives or beneficiaries of a deceased estate to access the concessions.

Editor.' Since these changes apply to the current income year (and further changes are planned from 1 July 2007), any small businesses contemplating selling any capital assets should contact us first, to determine whether, and when, any of these concessions may be available.

More on super changes

Editor. - The ATO has set out what they see are some of the immediate administrative impacts 'we all need to implement', in relation to the Simpler Superannuation changes starting 1 July 2007.

Quoting tax file numbers (TFNs)

From 1 July 2007, superannuation funds will:

  • pay tax at 46.5% on the contributions received in the income year for member accounts where no TFN has been quoted;
  • be prohibited from accepting certain contributions for accounts where no TFN has been quoted to the fund; and
  • have to report TFNs on members' contribution statements.

ATO mailout to commence

The ATO will be writing to the holders of 2.7 million superannuation accounts that do not have a TFN recorded from late April, asking those members if they can send their TFN to their superannuation fund.

They will have 28 days to let the ATO know if they do not want the TFN passed to the fund, otherwise the TFNs will be passed to the relevant funds.

"Employment" Termination Payments

Eligible termination payments as they currently exist will be replaced by "employment" termination payments and superannuation benefits from 1 July 2007.

Employment termination payments will cover payments where somebody is terminated from their employment.

Generally, employment termination payments will no longer be rolled into a superannuation fund.

However, there are some transitional arrangements for people that have employment entitlements in place before 10 May 2006.

Payments made under these arrangements will attract tax concessions designed to broadly mirror existing arrangements, and can be rolled into superannuation.

Budget 2007 - Small Business Initiatives

The Government has announced the following small business changes in the May 2007 Budget:

  • From 1 July 2007, a business with annual turnover of less than $75,000 ($150,000 for non-profit bodies) will no longer be required to register for GST.
  •  From 1 July 2008, taxpayers who voluntarily register for GST will be able to pay their PAYG instalments on an annual basis.
  • From 1 July 2007, any small business that makes mixed (taxable and GST ­free) supplies or mixed purchases will be able to approach the ATO to discuss the development of a simplified accounting method for their use.
  • From 1 July 2007, purchases by businesses of $75 or less (excluding GST) will no longer require a valid tax invoice to claim an input tax credit.

Budget 2007 - Child care tax offset is now a direct payment

From 1 July 2007, families will receive the existing child care tax offset (i.e., a 30% rebate on out-of-­pocket approved child care costs, up to a maximum of $4,000 per child, plus indexation) as a direct payment through Centrelink, soon after the financial year in which they incur child care costs.

Families will still receive the tax offset for out­-of-pocket costs incurred in 2005/06 through the lodgement of the 2007 income tax return.

No need to give duplicate copies of payment summaries

The ATO has decided that employers and certain other entities will no longer need to provide their employees and other payees with a duplicate copy of their PAYG withholding payment summary (Ed: Or `group certificate' in the old language...).

This exemption basically applies to entities making the following payments:

  • payments for work and services (except for payments made under voluntary agreements to withhold, payments under labour hire arrangements, or payments specified under regulations);
  • retirement payments (except for eligible termination payments); and
  • benefit and compensation payments.

Therefore, such entities are only required to provide the recipient with the original payment summary, and the recipient does not need to attach the duplicate to their return (if they lodge a paper return).

This exemption applies to payment summaries given on or after 1 May 2007.

Property Management

Main Residence and Rental Income

One of the common events that can occur when property investors enter the market is that they wish to move into a new residence as their main residence and rent their old residence. This can have some disadvantages from a tax point of view if the old residence has been paid off and they have to borrow to buy the new residence.

In this instance we have rental income being derived on the old residence and no interest expense, whereas on the new residence we have no rental income but are incurring interest. The overall tax result is rental income taxed and no deduction for interest. This situation could be better if the old property had been owned as "tenants in common". In this situation one of the owners could have borrowed to buy out the other owner. The selling owner could then use these funds to help purchase the new property. In this way at least the interest on 50% of the value of the old property could be offset against the rental income.

The principal residence capital gains tax exemption can still apply to the old residence even though it is being rented as long as it is not rented for a period in excess of 6 years. However, if the principal residence exemption is elected for the old residence it cannot be applied to the new residence for the same period of time, i.e. we cannot have an overlap where both are your principal residence.

If the old residence is rented for more than 6 years there will be an apportionment of the capital gain, which is best illustrated by an example.

The property was purchased in 1994 for $250,000. The couple lived in it for 5 years until 1999. It was then rented for 7 years and sold in 2006 for $1,250,000.

In 1999 when the couple moved out and rented the property a valuer valued the property at $550,000.

For CGT calculations, as the home was first rented after 20 th August 1996 (which is an important date) the value of the home will be $550,000 which is it's market value when it was first rented (not $250,000) with a resulting capital gain of $700,000 and not $lm. This is due to the fact that a full CGT exemption applies for any period prior to the home first being rented, if it is first rented after 20" August 1996.

As the couple first rented the home after the 20 th August 1996 they would be entitled to a full exemption from CGT for the period prior to renting out the home. Thus, they are only liable for CGT for increases in value past the date it was rented out, less the 6 years maximum rental concession. As they rented it for 7 years they will be liable for CGT for 1 year or 1/7 of the capital gain. The result is 1/7 of $700,000 yielding $100,000 subject to tax. As they held the property for more than a year they can claim the 50% CGT discount resulting in a taxable capital gain of $50,000.

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