No certainty to promised tax breaks

The Coalition promised small business certain tax concessions, reports TERRY HAYES. They are not yet law, but will the new Government stick by them?

By Terry Hayes

The Coalition promised small business certain tax concessions. They are not yet law, but will the new Government stick by them?

Governments of all persuasions regularly announce that they will make changes to the law, including the tax law, but it is often many months (sometimes longer) before those changes are legislated. This problem can be exacerbated when a federal election intervenes before an announced change can be turned into law.

This has now happened with an important and very useful change proposed by the previous federal government late last year, before the 2007 federal election was held. It concerns access to some tax concessions for SMEs.

On 22 October 2007, in the lead-up to the federal election, the then assistant treasurer Peter Dutton announced that the tax law would be amended to allow related entities and partners in partnerships to have improved access to the small business capital gains tax (CGT) concessions via the small business entity test.

The amendments were proposed to be made to the CGT small business concessions to allow an asset owned by a taxpayer, that is used in the business of an affiliate or a connected entity, to qualify for the small business concessions under the $2 million turnover test, even though the taxpayer may not be “a small business entity”. (See also our story on tax concessions).

These amendments would certainly be welcomed by SMEs.

However, there has been no announcement by the Rudd Government as to whether it will proceed with these amendments. The concern is that SMEs are currently being disadvantaged by the Government not implementing this change, especially as it was proposed to have retrospective effect from 1 July 2007. That is, it would be relevant to tax returns for the current year.

There also appears to be no reason why the amendments should not proceed given they mirror the equivalent provisions that apply under the $6 million “maximum net asset value test”.

Some details

Currently, the concessions cannot be utilised where the CGT asset is owned by an entity that is not a small business entity, even though the asset is being used by a related entity in carrying on a business.

Such a business structure may be established for sound commercial reasons, such as asset protection in the event of bankruptcy. For example, primary producers may seek to protect their land by holding it separately from the entity that runs the farming business.

Taxpayers using such structures are able to access the small business CGT concessions through the $6 million maximum net asset value test, where the relevant asset is owned by the taxpayer, and used in carrying on a business by the taxpayer’s affiliate or another entity connected with the taxpayer.

The proposed amendment would allow a taxpayer who owns a CGT asset that is used in a business by an affiliate or a connected entity of the taxpayer, to access the small business CGT concessions through the $2 million aggregate turnover test.

To ensure that larger businesses cannot use these structures to gain access to the concessions, the previous government proposed that the aggregated turnover test of $2 million a year would be applied to the asset owning entity, its affiliates and connected entities (including the business entity).

Partnerships and CGT assets

In a move designed to better align the small business entity test with the $6 million maximum net asset value test, the former assistant treasurer said a partner who owns a CGT asset would be able to qualify for the small business CGT concessions via the small business entity test, where the asset is used in a business carried on by the partnership.

It will not be necessary for each partner in the partnership to own the asset in accordance with their fractional interest in the partnership. Dutton said the amendment recognised that commercially, different partners may contribute different assets to the partnership for use in the business, while retaining their ownership of such assets.

The proposed amendment would allow a partner who owns a CGT asset to qualify for the concessions without the asset having to be an asset of the partnership, provided their aggregated turnover is less than $2 million, which will take into account the annual turnovers of the partnership, its affiliates and connected entities.

Some certainty needed

It would be welcome if the new Government could remove the prevailing uncertainty by promptly announcing if it intends to proceed with the amendments and (even more importantly) if so, whether the 1 July 2007 start date is still proposed.

The Government would be well aware that there is a reasonably large list of previously announced changes to the law that it needs to address. It may well just be another series of “things to do” for a new government, but taxpayers and their advisers require certainty so they can plan and manage their affairs.

Over to you Mr Swan or Mr Bowen.

Terry Hayes is the senior tax writer at Thomson Legal & Regulatory , a leading Australian provider of tax, accounting and legal information solutions.

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