Issues with accessing the small business CGT concessions after using the SBRR

The use of the small business restructure rollover may have impacts such as resetting the clock in respect of the 15-year exemption or making the active asset test much harder to pass. In this article we highlight some issues to watch out for.

Over the past year or two, there has been a significant rise in the popularity of the small business restructure rollover (‘SBRR’) contained in subdivision 328-G. When advisors are considering their clients eligibility for the SBRR and its consequences, questions inevitably arise surrounding how the SBRR will impact on their client’s ability to access the small business CGT concessions (particularly the 15 year exemption) in the future.

Whilst the good news is that there is bridging provision that deems the transferee under the SBRR as having acquired the relevant CGT asset when the transferor first acquired it, accessing the 15-year exemption is not without its difficulties. In some circumstances the transferee may be required to hold the CGT asset for a further 15-years in order to become eligible.

Bridging Provision

Where an entity validly chooses to apply the SBRR, subsection 152-115(3) applies to treat the transferee under the SBRR as having acquired the relevant CGT asset(s) at the same time as the transferor acquired the CGT asset(s). Subsection 152-115(3) provides:

If section 328-450 or 328- 455 applies in relation to the transfer of an asset to you, then paragraphs 152-105(b) and (c) and 152-110(1)(b) and (c) (the 15-year and significant individual rules) apply as if:

(a)  you had acquired the asset when the entity transferring the asset acquired it; or

(b)  in a case where, for the purposes of applying those paragraphs, the time when that entity acquired the asset was provided for by this subsection–you had acquired the asset at that time. [emphasis added]

The abovementioned paragraphs relevant to individuals (paragraphs 152-105(b) and (c)) reads as follows:

If you are an individual, you can disregard any * capital gain arising from a * CGT event if all of the following conditions are satisfied:

…

(b) you continuously owned the * CGT asset for the 15-year period ending just before the CGT event;

(c) if the CGT asset is a * share in a company or an interest in a trust–the company or trust had a * significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset;

… [emphasis added]

Whilst the abovementioned paragraphs relevant to trusts and companies (paragraphs 152-110(1)(b) and (c)) reads as follows:

(1) An entity that is a company or trust can disregard any * capital gain arising from a * CGT event if all of the following conditions are satisfied:

…

(b)  the entity continuously owned the * CGT asset for the 15-year period ending just before the CGT event;

Note: Section 152- 115 allows for continuation of the period if there is an involuntary disposal of the asset.

(c)  the entity had a * significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset;

… [emphasis added]

From the above provision we can see that the intended effect of them was an attempt to not adversely impact a small business’ eligibility for the 15 year exemption when they utilised the SBRR to restructure. However, in certain circumstances the bridging provision seems inadequate.

15 Year Exemption – Significant Individual Condition

Where the transferee under an SBRR is a trust or a company an issue arises in respect of that entity’s ability to satisfy the significant individual requirement of the 15-year exemption, subsequent to the rollover.  This is because whilst subsection 152-115(3) deems an earlier acquisition date of the relevant CGT asset, it does not appear to include a mechanism which can deem that the transferee also had a significant individual for that period of deemed ownership.

When interpreting subsection 152-115(3) it is clear the provision has application to the significant individual condition (being paragraph 152-110(1)(c)). However, there is difficulty in construing paragraph 152-115(3)(a) as doing more than merely deeming an acquisition date based on its plain language “you had acquired the asset when the entity transferring the asset acquired it”. Furthermore, the explanatory memorandum to the bill that introduced the SBRR merely contains a single paragraph in respect of subsection 152-115(3), replicated below, and appears to provide no basis to support an interpretation other than the provision solely deeming the acquisition date and no more.

Effect on 15 year CGT exemption

1.73 For the purpose of determining eligibility for the 15 year CGT exemption for small businesses, the transferee will be taken as having acquired the asset whether the transferor acquired it. [Schedule 1, item 4, subsection 152-115(3)]

The above issue becomes most problematic in a situation where a new trust or company is established shortly before the SBRR is undertaken. In such a case the trust or company would have had a significant individual for close to nil years during the deemed period of ownership. Consequently, the trust or company would be required to hold the asset for near enough 15-years before it would be capable of satisfying the significant individual condition.

Example 1

Taxpayer, who is 58 years old, carries on a small business as a sole trader. In the 2023 financial year Taxpayer establishes a discretionary trust in which they are the sole director of the trustee company. In the 2023 financial year Taxpayer utilises the SBRR to roll the business into the trust, at the time of the rollover, Taxpayer had owned the business for 11 years.  In the 2028 financial year Taxpayer sells the business and retires.

Although, the trust will be deemed to have owned the business for more than 15 years for the purposes of applying the 15-year exemption, the trust will only be capable of having a significant individual for the last 5 of the 16 years it is deemed to have owned the business, well short of the requisite required 15 years. Consequently, neither the trust nor the Taxpayer will be eligible for the 15-year exemption. However, they may still be eligible for other small business CGT concessions.

Another key issue – Active Asset Test

In addition to the above, subsection 152-115(3) only deems the continuity of ownership for the purposes of applying paragraphs 152-105(b) and (c), and 152-110(1)(b) and (c). It does not operate to deem the transferee’s acquisition date for the purposes of the basic conditions for the small business CGT concessions or any other specific conditions. For example, the testing period under the active asset test (a basic condition) resets to the date the transferee actually acquired the relevant CGT asset.

Example 2

Taxpayer and Spouse are a married couple who are both 58 years old. Taxpayer carries on a business through a discretionary trust (‘Trading Trust’). The business has always operated from a commercial property that Trading Trust acquired in 2010. Spouse is employed in the business in an administrative capacity. Each year Trading Trust distributes its income equally between Taxpayer and Spouse.

Taxpayer and Spouse have recently become aware of the asset protection risks associated with the commercial property being held under the same trust as the business. On 1 July 2022, Trading Trust utilises the SBRR to transfer the property solely into Spouse’s name. On 1 July 2025, Trading Trust decides to relocate its business, after having outgrown the commercial property, and leases a much larger commercial property from an unrelated party. Spouse leases out the commercial property to an unrelated party.

Upon reaching 65 (after 1 July 2029) Taxpayer and Spouse decide to retire and sell both the business and the commercial property. As there is no significant individual condition for the 15-year exemption for individuals, Spouse will not have the same issue as the trust in Example 1 on selling the property. However, for the active asset test Spouse has owned the commercial property for only 7 years, and so they cannot satisfy the active asset test as the 3 years that Trading Trust used the commercial property in its business is less than half of Spouse’s ownership period of 7 years. Consequently, Spouse will not be eligible for the 15-year exemption on the sale of the property, despite the commercial property having been owned by the group for more than 15-years and actively used by the group in carrying on a business for far more than 7.5 years.

Furthermore, as the active asset test is common to all of the small business CGT concessions (being one of the basic conditions), failure to pass this test means that Spouse is not eligible to apply any of the small business CGT concessions to the capital gain arising on the sale of the commercial property.

As can be seen, consideration needs to be given to potential future consequences when considering the SBRR. Advisors should discuss with their clients their long-term plans for their business and/or business assets to seek to minimise any unintended consequences from using the SBRR. This may have impacts ranging from material additional tax payable on the disposal of a business, or business assets to removing/reducing the ability to contribute capital proceeds to superannuation (under the lifetime CGT cap).

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