Small business CGT concessions

The CGT concessions for small business are complicated. Two recent cases have not made them any easier to understand.

In the first case, a property used to store materials, tools and equipment for use in a building, bricklaying and paving business was not considered to be used in the course of carrying on that business. This was because storing materials did not have a “direct functional relevance” to the daily income-producing activities of the business.

As a result, the property was not an active asset and therefore the capital gain made on the sale of the property did not qualify for the CGT concessions.

In the second case, 3 shareholders sold their shares in a company (each owned one-third) to a single purchaser. The sale contract included a restrictive covenant whereby the 3 vendors agreed not to compete with the purchaser for 5 years (not uncommon when a business is sold).

One of the vendors argued that as the restrictive covenant did not come into existence until the sale contract was concluded, its value should be excluded in working out if he satisfied the maximum net asset value test ($6 million). Under that test, only assets in existence just before the sale contract was concluded would be taken into account. If the value of the shares for the purposes of that test was the amount specified in the sale contract, the vendor would not satisfy the test and would not qualify for the CGT concessions.

The vendor was unsuccessful as the restrictive covenant impacted on the value of the shares. The purchaser would naturally want the covenant as the success of the business depended on the contribution of the 3 shareholders. The value of the shares was increased by the covenant. Without it, the sale price would have been less.

Tip! If contemplating selling your business, talk to your tax agent. It is advisable to plan well in advance if you want to take advantage of the generous CGT small business concessions.

Read our complete February 2020 Taxwise Business Newsletter here

Back to news