Requirements

There are two requirements that must be satisfied for the reduction to be available.  They are:

1. The basic conditions for Small Business CGT Concessions must be satisfied.  They relate to things like the CGT Small Business Entity Test, the Maximum Net Asset Value Test, the Active Asset Test and the four additional tests for shares in a company or units in a unit trust; and

2. The choice to apply the small business 50% reduction must be made by the day the taxpayer lodges their income tax return for the relevant year in which the capital gain arose, or a longer period if allowed by the Commissioner.  And the way the income tax return is prepared is sufficient evidence of the making of the choice.

What the reduction is

Where the small business 50% reduction applies, the capital gain remaining after applying capital losses and any discount for discount capital gains is reduced by 50%.

The taxpayer does not have to apply the small business 50% reduction.

But if they do, the small business 50% reduction applies in priority to the small business roll-over and the small business retirement exemption.

Also, the small business 50% reduction does not apply where the small business 15-year exemption applies.

Examples

Here are some examples of situations where you might not want to apply the reduction or where the reduction might be problematic.

1. Where the taxpayer may want to place greater reliance on the small business retirement exemption in order to be able to contribute additional funds into superannuation;

2. Where the taxpayer is a unit trust and the distribution to unit holders of the portion of the capital gain that is reduced by the small business 50% reduction results in a reduction to the unit holder’s tax cost base in their units and / or a capital gain to the unit holder, both under CGT event E4; and

3. Where the taxpayer is a company and the distribution to shareholders of the portion of the capital gain that is reduced by the small business 50% reduction may well be an unfranked distribution if there are not sufficient franking credits available to frank the distribution.  And this may be the case given the small business 50% reduction should result in less income tax being paid, and therefore less franking credits being available.

   A solution to this might be to liquidate the company if that were possible, in which case the portion of the capital gain that was reduced by the small business 50% reduction may be able to be distributed as a return of capital potentially benefiting from any discount for discount capital gains and a further application of the Small Business CGT Concessions.

Disclaimer – The above is intended as commentary and general information only.  It should not be relied upon as taxation advice.  Formal taxation advice should be sought for particular transactions or on matters of interest arising from the above.