What tax should the Federal Government reform and why?

That was the question that the Institute of Public Accountants asked me and three others for their ‘Public Accountant’ journal. My response was as follows:

“In my opinion, the CGT discount.

A good tax is one that is fair – imposing a higher burden on those with greater means to pay, efficient – imposing minimal distortions to the operation of the free market and simple – imposing minimal costs (in terms of time and advisor fees) on taxpayers. The CGT discount (and in particular the level it is set at) may be simple, but it is also too generous and, as a result, fails the first two of those tests miserably.

Capital gains are disproportionately made by wealthier Australians (who are more likely to have surplus funds to invest) and therefore they receive a disproportionate share of the benefits of the discount. This is illustrated by the fact that the two electorates that benefited most from the discount encompass Point Piper in Sydney and Toorak in Melbourne. I think that government funds could be better spent.

Furthermore, the CGT discount encourages taxpayers to structure their affairs in a way that favours capital investment over actions or investments that lead to other forms of income. When combined with negative gearing, this is a key driver of Australia’s red-hot property market. While there are good reasons to encourage investment, I don’t believe they are sufficient to justify a 50% discount after only 12 months.

How would I reform the CGT discount? There are a number of good options but one to consider would be to bring in a rough approximation of indexation. Apply the discount to capital gains at the rate of 5% per full year that the CGT asset is held, capped at 50% after 10 years. I believe would strike the right balance between encouraging investment without distorting the market too much or providing a free kick to those who need it least.”

If you’re interested to see a pdf of the article (and what the other three people said), I’d be happy to share a copy with you. Just send me a message.


P.S. Please feel free to share your thoughts on the topic in the comments section below. I’d be curious to hear from any readers.


Small Business Restructure Rollover

The following article originally appeared on the WTS Australia website in March 2016.



Roll-over relief was previously available for transfers of a CGT asset, or all the assets of a business, from a sole trader or partnership, to a wholly-owned company. The small business restructure roll-over supplements these existing roll-overs by also allowing small business owners to defer gains or losses that they would otherwise make from transfers of business assets from one entity to another as part of a genuine restructure.

It is intended that the roll-over will facilitate flexibility for owners of small business entities by allowing them to restructure their businesses via a change of legal structure. This is in recognition of the fact that the most appropriate structure for a small business may change over time and that restructuring may lead to benefits, both for the small business itself and for the economy as a whole.

The roll-over will apply to transfers of CGT assets, depreciating assets, trading stock or revenue assets on or after 1 July 2016.


Availability of the roll-over

The roll-over is available if an asset is transferred to one or more entities and;

  1. The transaction is, or is part of, a genuine restructure of an ongoing business; and
  2. Each party to the transfer is a small business entity (SBE) or alternatively an affiliate of, connected to, or a partner in, an SBE; and
  3. The transaction does not have the effect of materially changing the ultimate economic ownership of the asset; and
  4. The asset is a CGT asset and is, at the time of the transfer, an active asset of the relevant SBE; and
  5. The transferor and transferee(s) are Australian residents; and
  6. The transferor and transferee(s) choose to apply the roll-over.


Genuine restructure – safe harbour

The requirement that the transaction be part of a ‘genuine’ restructure is intended to deny the roll-over to artificial or inappropriately tax-driven schemes. Whether a restructure is ‘genuine’ is a question of fact, to be determined having regard to all of the facts and circumstances surrounding the restructure.

To provide certainty, a small business will be taken to satisfy the requirement of a genuine restructure where, for three years following the roll-over;

  • There is no change in the ultimate economic ownership of any of the significant assets of the business (other than trading stock) that were transferred under the transaction;
  • Those significant assets continue to be active assets; and
  • There is no significant or material use of those significant assets for private purposes.

If a business does not meet the requirements of the safe harbour, it can still access the roll-over by satisfying the general principle that the transaction is, or is part of a genuine restructure.


Small business entity

An entity is a small business entity if it meets the requirements under Subdivision 328-C ITAA 1997. Broadly, this requires the entity to carry on a business and have a turnover, when combined with affiliates and connected entities, of less than $2m. Previously the bill also required the taxpayer to satisfy the maximum net asset value test. This requirement has been removed.


Ultimate economic ownership and discretionary trusts

Ultimate economic owners are individuals who, directly or indirectly, beneficially own an asset. Where a non-fixed (e.g. discretionary) trust is involved in the transfer, the requirement will be satisfied where the trust has made a family trust election (FTE) and, the ultimate economic owners of the asset, just before and just after the transfer, are members the trust’s family group.  Before making an FTE consideration should be given to the fact that it effectively limits the beneficiaries eligible to receive distributions to those within the family group.


Active asset

The meaning of active asset is given in Subdivision 152-A ITAA 1997. Broadly, an asset is active if it is used, or held ready for use, in the course of carrying on a business or if it is an intangible asset inherently connected with a business. Loans to shareholders of a company are not active assets and therefore the roll-over cannot be used to circumvent the operation of Division 7A.


Consequences of the roll-over


Consequences for the transferor

The small business restructure roll-over is intended to be tax-neutral with no direct income tax consequences to the transferor. For example, the transfer of an asset by a company to a shareholder will not trigger a capital gains tax liability nor an assessable dividend under section 44 or Division 7A ITAA 1936.


Consequences for the transferee

Broadly, the transferee is taken to have acquired each asset for an amount equal to the transferor’s roll-over cost just before the transfer. This is the transferor’s cost such that the transfer would result in no gain or loss for the transferor.

CGT assets are deemed to have been acquired for an amount equal to the cost base of the asset. Pre-CGT assets will retain their pre-CGT status in the hands of the transferee. However, the time period for eligibility for the CGT discount will recommence from the time of the transfer. For the purposes of determining eligibility for the small business 15-year exemption, the transferee will be taken as having acquired the asset when the transferor acquired it.

The transferee of trading stock will inherit the transferor’s cost and other attributes just before the transfer. Therefore, the asset’s roll-over cost will be an amount equal to the cost of the item for the transferor, or, if the transferor held the item as trading stock at the start of the income year, the value of the item for the transferor.

The roll-over cost of revenue assets is the amount that would result in the transferor not making a profit or loss on the transfer.

Where deprecating assets are transferred the transferee can deduct the decline in value of the depreciating asset using the same method and effective life (or remaining effective life) as the transferor was using.


New membership interests issued as consideration for the transfer

Where membership interests (e.g. shares or units) are issued in consideration for the transfer of a roll-over asset or assets, the cost base of those new membership interests is worked out as follows:

The sum of the roll-over costs, less any liabilities that the transferee undertakes to discharge in respect of those assets  




The number or membership interests



Membership interests affected by transfers

Where an asset transfer is made at other than market value, decreases and increases in the market value of any interests that are held in the transferor and transferee can result. An integrity concern can arise where the transfer of value from an entity could result in the creation of tax losses on later disposal of the membership interests. A ‘loss denial’ rule is intended to address these concerns. This rule states that a capital loss on any direct or indirect membership interest in the transferor or transferee that is made subsequent to the roll-over will be disregarded, except to the extent that the taxpayer can demonstrate that the loss is reasonably attributed to something other than the roll-over transaction.



The small business restructure roll-over is a generous addition to Australia’s income tax laws. It presents opportunities for small business owners to tax-effectively restructure their affairs.

However, taxpayers should bear in mind the limitations of the roll-over. Specifically, the roll-over;

  • Will not affect a tax liability arising under another Commonwealth tax (for example fringe benefits tax or goods and services tax) or a liability for stamp duty under State legislation
  • Does not prevent the general anti-avoidance provisions of Part IVA from applying
  • Does not extend to exempt entities or a complying superannuation entity.
  • Does not extend non-active assets such as investment assets or Division 7A loans.

Small business owners should contact us to discuss the costs and benefits of a restructure in light of these new amendments.


“Hotel, Motel, Holiday Inn” – Deriving Rent and the small business CGT concessions

The following article appeared in the December edition of ‘The Taxpayer’ by Tax & Superannuation Australia. Unfortunately I cannot upload a PDF or link to the article so the unformated text below will have to suffice. Please contact me if you would like to discuss anything in this article.


“Hotel, Motel, Holiday Inn”[1] – Deriving Rent and Accessing the Small Business CGT Concessions

Simon Dorevitch examines the pitfalls of satisfying the active asset test for assets which are used to derive rent.

Back to basics: The active asset test

To access the small business CGT concessions, certain conditions must first be satisfied. One such condition is that the CGT asset satisfies the active asset test. Satisfying this test requires the asset to be an active asset of the taxpayer for the lesser of 7.5 years and half of the relevant ownership period.

A CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business by the taxpayer, their affiliate or an entity connected with them (relevant entities).

However, certain assets are specifically excluded from being an active asset. One such exclusion applies to assets whose main use by the taxpayer is to derive rent, unless the main use for deriving rent was only temporary. When determining the main use of the asset, the taxpayer is instructed to disregard any personal use or enjoyment of the asset by them and to treat any use by their affiliate or entity connected with them as their own use.

Carrying on a business

To qualify as an active asset, a tangible CGT asset must be used or held ready for use in the course of carrying on a business by the taxpayer or a relevant entity. There is no conclusive test for determining whether a business is being carried on. However, in Tax Ruling TR 97/11, the ATO has enumerated several indicators of a business that may be relevant, including;

  • The size, scale and permanency of the activity
  • Repetition and regularity of the activity
  • Whether the activity is planned, organised and carried on in a systematic and businesslike manner
  • The expectation, and likelihood, of a profit

It is highly likely that the operator of a hotel would be conducting a business. In contrast, most residential rental activities are a form of investment and do not amount to carrying on a business. However, the following examples indicate that it is possible to conduct a rental property business.

Example 1 – Taxpayer was conducting rental property business[2]

The taxpayers owned eight houses and three apartment blocks (each comprising six residential units), making a total of 26 properties. They actively managed the properties, devoting a significant amount of time (an average of 25 hours per week) to them. The ATO concluded that the taxpayers were carrying on a business.

Example 2 – Taxpayer was conducting rental property business [3]

The taxpayer owned nine rental properties. Although they were managed by an agent, the taxpayer spent considerable time undertaking tasks in connection with the properties. Despite finding that the taxpayer’s methods were unsophisticated and un-business-like, the AAT concluded that the taxpayer was carrying on a business.


The Small Business CGT Concessions may still be available where the taxpayer (i.e. owner of the asset) is not carrying on a business. This would be the case, for example, where the CGT asset is used in a business carried on by the taxpayer’s affiliate or connected entity and this other entity is a ‘small business entity’ (broadly one with a turnover less than $2m).

Deriving rent

An asset whose main use by the taxpayer is to derive rent cannot be an active asset (unless this main use was only temporary).

It has been argued that this exception does not apply to properties where the taxpayer carries on a business of leasing properties, but rather only to passive investment assets. The AAT rejected this argument, stating clearly that it does not matter if the taxpayer is in the business of leasing properties or not. [4]

There is no statutory definition of rent that is relevant in this context so the term takes on its common law meaning.

Where there is a question of whether the amount paid constitutes rent, a key factor to consider is whether the occupier has a right to exclusive possession of the property. If such a right exists, the payments involved are likely to be rent. Conversely, if the arrangement allows the occupier only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.

Other relevant factors include the degree of control retained by the owner, the extent of any services performed by the owner (such as room cleaning, provision of meals, supply of linen and shared amenities) and the length of the arrangement.

Example 3 – Payments for use of a commercial storage facility were not rent[5]

Christine carries on a business of providing commercial storage space. Each space is available for hire periods of 1 week or more. She provides office facilities, on-site security, cleaning and various items of equipment for sale or loan. The agreements provide that in certain circumstances Christine can relocate the client to another space or enter the space without consent and that the client cannot assign the rights under the agreement. Having regard to all the circumstances, the ATO concluded that the amounts received by Christine were not rent.

Example 4 – Payments for occupancy of boarding house were not rent[6]

David operates an 8-bedroom boarding house. The average length of stay is 4-6 weeks. Visitors are required to leave the premises by a certain time and David retains the right to enter the rooms. David pays for all utilities and provides cleaning and maintenance, linen and towels and common areas such as a lounge room, kitchen and recreation area. The ATO concluded that the amounts received by David were not rent.

Example 5 – Payments for occupancy of holiday apartments were not rent[7]

Linda owns a complex of 6 holiday apartments, advertised collectively as a motel. Each is booked for periods not exceeding 1 month, with most bookings being for less than 1 week. Guests do not have exclusive possession of their apartment, but rather only a right to occupy on certain conditions. Clean linen, meal facilities and cleaning are provided to guests. The ATO found that Linda’s income was not rent.

Example 6 – Payments for short stays in a caravan park were not rent[8]

The taxpayer owned and operated a caravan park that consisted of fully-furnished self-contained cabins, caravans set up on blocks and sites for guests with their own caravans. Guests also had access to a shared amenities block. The ATO ruled that short-term guests (those staying less than 3 months) did not pay rent while long-term guests (3 months or longer) did.

Example 7 – Payments for occupancy of mobile home park were rent[9]

The taxpayer owned and operated a mobile home park that consisted of 77 sites and a ‘community hall’ with shared facilities such as a kitchen, toilet and recreation area. In reaching the conclusion that the payments for use of the park were rent, the AAT found that the following factors were relevant; the park owner agreed to give vacant possession to a resident on a certain date, the resident was granted exclusive possession and had the right of quiet enjoyment, and the residential site was occupied as the resident’s ‘principal place of residence’.

Example 8 – Payments for short stays in holiday unit were rent[10]

The taxpayer owned a holiday home that was used to provide short term tourist accommodation (i.e. stays of about one to two weeks). Crockery, cutlery and linen were provided but cleaning was done only after the occupants departed. The AAT found there to be little doubt that the occupants regarded themselves as having rented the unit for the period of their stay and as having exclusive possession. Therefore, the payments did constitute rent.

What is the main use?

Where a CGT asset is used partly to derive rent and partly in the business of the taxpayer or relevant entity, it will be necessary to determine the ‘main use’ of the asset. This is because an asset whose main use by the taxpayer is to derive rent cannot be an active asset (unless the main use for deriving rent was only temporary).

The term main use is not defined in Division 152 (which contains the small business CGT reliefs). Tax Determination TD 2006/78 states that no single factor will necessarily be determinative and resolving the matter is likely to involve a consideration of factors such as;

  • The comparative areas of use of the premises,
  • The comparative times of use of the asset and, most importantly.
  • The comparative level of income derived from the different uses of the asset.

Example 9 – Mixed use[11]

Mick owns land on which there are several industrial sheds. He uses one shed (45% of the land area) to conduct a motorcycle repair business and leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the repair business is 80% of the total income, while the income derived from leasing the other sheds is only 20% of the income. Having regard to all the circumstances, the ATO considers that the main use of Mick’s land is not to derive rent.

Example 10 – Mixed use[12]

The taxpayer owned a shopping centre. Most the shops (constituting 73% of the floor space) were rented by unrelated shopkeepers but some (27% of the floor space) were used by the taxpayer to conduct business. Despite this, the ATO ruled that the main use of the shopping centre was not to derive rent because the majority (63%) of the income generated from the asset was from the business and only 27% was generated from rent.

In a recent AAT case[13], the taxpayer argued that the word ‘use’ in ‘main use’ could include non-physical uses such as holding a property for the purposes of capital appreciation. This argument was rejected, with the AAT finding that the concept of use was a reference only to physical use.

Treat use by affiliate/connected entity as taxpayer’s own

When determining the main use of the asset the taxpayer is instructed to treat any use by a relevant entity as their own use.

Example 11 – Use by affiliate[14]

John rents 80% of a property to his affiliate Peter and uses the remaining 20% in his business. Peter uses 60% of the area rented to him in his business and rents the remaining 40% to an unrelated party. 32% of the property (80% x 40%) is being treated as being used to derive rent. However, the remaining 68% is either actually used in John’s business (20%) or is treated as being used in his business (48%, being 80% x 60%). Therefore, the main use of the property is not to derive rent.


Ignore private use

When determining the main use of the asset the taxpayer is also instructed to disregard their own personal use or enjoyment of the asset. This point can be illustrated by the following example;

Example 12 – Private use disregarded[15]

Neil rents 60% of a property to his affiliate Andrea, uses 15% in his business and the remaining 25% for his own personal use.  Because personal use by the owner or relevant entity is ignored in determining the property’s main use, the above proportions must be adjusted. Following the adjustments Neil rents 80% (60% x (100/75)) of the property to Andrea and uses 20% (15% x 100/75) in his business.

Is the main use only temporary?

Finally, a CGT asset whose main use is to derive rent will not be precluded from being an active asset if this main use is only temporary. There is scarce guidance regarding what is  considered temporary in this context. However, in the context of whether a share in a company or interest in a trust is an active asset, an example in the explanatory memorandum[16] indicates that a failure to satisfy the 80% look-through test for two weeks would be of a temporary nature only and therefore would not prevent the share or interest from being an active asset.


As always I would like to remind readers that

  1. The article does not constitute advice and is not intended to be comprehensive. While I have attempted to ensure the accuracy of the article I do not give any assurances. Please seek your own professional advice.
  2. The views in the article are mine alone and do not necessarily represent those of my employer or Tax  & Superannuation Australia

[1] Rapper’s Delight by Sugar Hill Gang, 1979

[2] ATO’s Guide for rental property owners (NAT 1729-06.2016)

[3] YPFD and Commissioner of Taxation [20-14] AATA 9

[4] Jakjoy Pty Ltd v FACT [2013] AATA 526

[5] Example 2 of Tax Determination TD 2006/78

[6] Example 3 of Tax Determination TD 2006/78

[7] Example 4 of Tax Determination TD 2006/78

[8] PBR 1012886042948

[9] Tingari Village North Pty Ltd and Commissioner of Taxation [2010] AATA 233

[10] Carson and Commissioner of Taxation [2008] AATA 156

[11] Example 5 of Tax Determination TD 2006/78

[12] PBR 70707

[13] The Executors of the Estate of the late Peter Fowler v FCT [2016] AATA 416

[14] Example 2.13 of Explanatory Memorandum to Tax Laws Amendment (2009 Measures No. 2) Act 2009

[15] Example 2.14 of Explanatory Memorandum to Tax Laws Amendment (2009 Measures No. 2) Act 2009

[16] Example 1.12 of Explanatory Memorandum to Tax Laws Amendment (2006 Measures No. 7) Act 2007


Taxing issues for departing taxpayers

The following article originally appeared in the November 2016 issue of The Taxpayer. This is the monthly journal of Tax & Super Australia (formerly Taxpayers Australia).


If you have any questions abou the issues raised in the article, please don’t hesitate to leave a comment, send me an email or contact me via LinkedIn.

There are a number of excellent articles in the magazine and I encourage you to get hold of a copy.

I will be contributing regularly to The Taxpayer. My next article will appear in December and will be on rental income and the small business CGT concessions.


Maximising the Main Residence Exemption

Australians have always placed great importance on owing one’s own home. Given this ‘Australian Dream’ it perhaps not surprising that, while almost every OECD country offers concessional tax treatment to gains made on owner-occupied housing, the Australian tax code is amongst the world’s most generous. Specifically, there is a full ‘main-residence’ exemption (subject to conditions of course) from capital gains tax where you sell a dwelling that was your main residence throughout the ownership period.

While many, including myself, have criticised the exemption on both equity and efficiency grounds (perhaps a topic for another day), the Australian Dream and indeed the Main Residence Exemption is likely to remain sacrosanct and therefore largely unchanged. It therefore behoves all home owners and prospective home owners to understand the exemption and how they can maximise its benefits. This article aims to help them do this.

Basic conditions

A capital gain (or loss) will be exempt if it is made by;

  • An individual
  • on the disposal (and some other CGT events) of their
  • dwelling (pretty much anything beyond a tent that is habitable)
  • that was their main residence throughout the period of ownership

It is worthwhile mentioning that nowhere does it say the individual must be a resident or that the dwelling must be located in Australia. Please also note that there are special rules for dwellings owned by Special Disability Trusts or acquired from a deceased estate but, to keep things brief and simple, I will not be covering them in this article.

The term ‘main residence’ is not defined but is of course absolutely key. Clients often ask what they need to do to establish a residence as their ‘main residence’ and in particular how long they need to live there. There is no stated minimum period though perhaps the ‘building concession’ (see below) period of 3 months may provide an informal ‘rule of thumb’. It is even conceivable that a much shorter period could be sufficient. Such a situation may occur, for example, where a person moves in to the dwelling with the intention of occupying it is their main residence indefinitely but, shortly after moving in, is relocated by their employer.

Where an individual owns multiple residences it may not always be easy to tell which is their main residence. Factors that are likely to be taken into account are;

  • Where their personal belongings are located
  • Where their mail is delivered
  • Their address on the electoral roll and
  • The taxpayer’s intentions.

Practically, where a strong case can be made for both dwellings, an accountant is likely to recommend simply choosing the dwelling that will give the most favourable outcome for the taxpayer.

Maximising the exemption

There are a number of generous concessions that extend the exemption.

Adjacent land and structures

The main residence exemption is also available to adjacent land and adjacent structures (e.g. a garage, storeroom, shed or granny flat) provided that it is used “primarily for private or domestic purposes in association with the dwelling” and it is disposed of together with the dwelling.

The extension to adjacent land is limited to 2 hectares (including the land underneath the dwelling) but where the land being sold exceeds this the taxpayer can choose which 2 hectares of the property will qualify.

Time required to move in to a dwelling

The main residence exemption covers the period from when an ownership interest is acquired until it is “first practicable” to move in to the dwelling. The courts have not taken a particularly generous view of what is practicable. For example, iIt does not apply where a dwelling is subject to a lease with a third party that prevents the new owner from moving in. However, it would apply where “illness or other reasonable cause” prevented the new owner from moving in straight away or where a dwelling needed to be repaired first.

Changing main residence

Where a taxpayer acquires a new dwelling before disposing of their current residence they are permitted to claim the exemption on both dwellings for up to six months. This is provided that the original dwelling was their main residence for at least 3 of the 12 months prior to its disposal, it was not used to produce income in the previous 12 months and the new dwelling becomes their main residence. This is the only concession that allows a taxpayer to claim the main residence exemption on two dwellings at the same time. Under all other concessions if a dwelling is deemed to be the main residence then another dwelling cannot also be treated as such at the same time.

Absences concession

Once a dwelling has been established as a main residence the owner can move out and chose to treat it as if it continued to be their main residence. They can do so for up to six years if it is used for income producing purposes or indefinitely where there is no income use. It is not necessary for the taxpayer to move back in to the dwelling before selling it though if they do re-establish it as their main residence the absences concession resets and can be applied again.

Building concession

Typically the main residence exemption cannot be claimed on land. However, where a taxpayer builds, renovates or repairs a dwelling and is not occupying it, the land that the dwelling is on can be treated as their main residence for a maximum of 4 years (or longer in such rare cases that the Commissioner allows it). This concession could be used, for example, where a taxpayer demolishes an existing residence and builds a new one. There are two conditions, however; the dwelling must become the taxpayer’s main residence “as soon as practicable after the work is finished” and it must continue to be their main residence for at least three months.

Sale of land after destruction of a dwelling

If a dwelling is “accidentally destroyed” (e.g. by a fire or natural disaster) and it was your main residence immediately before its destruction, you can chose to apply the exemption to a sale of the vacant land on which the dwelling was built.

Restrictions on the exemption

Though the main residence exemption is generous there are still restrictions owners need to know about.

Spouses with different main residences

Where spouses (this includes de facto and same-sex relationships) have different main residences they can either chose to claim a full exemption on one of the properties or a partial exemption on both properties.

Income producing use

If a dwelling was rented (or made available for rent) or used as a place of business (e.g. a doctor’s surgery), for some or all of the ownership period then a full CGT exemption is not available.

Where a main residence is first used to produce income after 20 August 1996 there is a deemed acquisition for market value (refer to PS LA 2005/8 for what this means) at that time. However, this rule interacts with the absences concession (described above) such that where an election is made to apply the absences concession there is no deemed acquisition for the first 6 years of income producing use. Where the dwelling is rented for a period exceeding 6 years, the deemed acquisition occurs immediately after the end of the 6 year period.

Finally, it should be noted that where a dwelling qualifies for only a partial exemption, the CGT general discount (50% for individuals) can reduce the taxable gain, though the deemed acquisition for market value described above resets the 12 month ownership period required to access the discount . The small business CGT concessions may also be available.


This article does not seek to be a comprehensive or definitive reference on the main residence exemption for all tax payers. For the sake of simplicity, flow and brevity I may not have mentioned something that is important to your circumstances.

It is important to remember that everybody’s situation is different and what is mentioned in this blog may not apply to you. I urge you to seek professional advice that is tailored to your circumstances.

Please ensure that you also read the full disclaimer on my ‘welcome’ post.


Small business CGT concessions – Connected entities

It’s been a while since my last post because, well let’s face it – there are more enjoyable ways to spend your free time than writing about tax. However, this week I had the opportunity to advise two separate clients on the small business CGT concessions and figured I would take it as a sign that I should finally continue my series on small business CGT concessions. Today’s post will be about connected entities.

When applying the aggregated turnover test (and similarly when applying the maximum net asset value test as we shall see in a future blog post) a connected entity’s turnover is taken into account. That is, when determining if aggregated turnover of a taxpayer is $2m or less, it is necessary to count the turnover of its connected entities. To do this it will obviously be necessary to first identity which entities are connected.

One entity is connected with another entity if either entity controls the other entity or both entities are controlled by the same third entity.  When thinking about connected entities key number to remember is 40% because control will generally occur if the control percentage is 40% or more. However, the Commissioner does have the power to determine that control does not exist if the percentage is between 40 and 50% (say because another entity owns 50-60%). Remember also that control can be direct or indirect such as where an entity directly controls a second entity and this second entity directly controls a third.

There are different rules for establishing control for different types of entities so I will consider each separately;


A shareholder will have a 40% control percentage where, together with its affiliates (more on that in my next post) it beneficially owns shares that have the right to at least 40% of any dividends paid, any distributions of capital or voting power.

Unit Trusts

A unit holder will have a 40% control percentage where, together with its affiliates it beneficially owns units that have the right to at least 40% of any distributions of income or distributions of capital. Unlike companies there is no equivalent voting power test.

Discretionary Trusts

There are two ways an entity can control a discretionary trust.

The first way is by influencing  a trustee – where the trustee acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity, its affiliates or the entity acting together with its affiliates (deep breath). Some of the factors to consider when determining this include

How the trustee has acted in the past

The relationship between the entity and trustee

The amount of any property or services transferred to the trust by the entity  and

Any arrangement or understanding between the entity and any person who has benefited under the trust in the past

This test seems to have some strange consequences. On a strict reading, this rule seems to suggest that a sole director of a corporate trustee would be connected but not an individual acting in their own right as trustee. If the corporate trustee has two directors and decisions are made by them jointly neither one of them will control the trustee.  Finally, according to the Commissioner, an appointor will control a discretionary trust, even if it has no day-to-day involvement.

The other way to determine control of a discretionary trust is to look at the pattern of distributions in the previous four income years (excluding the current year in question).  A beneficiary controls a discretionary trust in an income year if at least 40% of the trust’s income or capital is paid/applied for the benefit of it and/or its affiliates.

Some things to note include;

According to new rules which apply to CGT events on or after 27 June 2011, if a trust is unable to establish a beneficiary-controller because it is unable make a distribution, the trustee may nominate up to 4 beneficiaries as controllers. This would occur where the trust had a tax loss or no net income and the trustee did not make a distribution of income or capital for that year.

It is income or capital but these are considered separately. If a beneficiary receives 35% of each they will not control the trust but a beneficiary who receives 40% of one and 0% of the other will.

Exempt entities and deductible gift recipients (e.g. charities) cannot be treated as controlling, regardless of the percentage of distributions made to them.


Even though a partnership is not a separate legal entity, it can be a connected entity. A partner  will be connected with a partnership if he/she/it is entitled to receive at least 40% of the income or net income of the partnership or at least 40% of distributions of capital

Hybrid Trusts

These would probably be considered under the discretionary trust rules.


Although a super fund is a type of trust, the Commissioner’s view is that it will not be connected with any of its members or trustee. This opens up opportunities to reduce your net assets by contributing funds or assets into a super fund. Of course the contribution rules will need to be considered before doing this.


In my next post I’ll write about affiliates.



Small Business CGT Concessions: Small Business Entity Test – Part 1

In this post we’ll start to cover how a taxpayer can satisfy the small business entity test. This test was introduced for CGT events happening from the 1 July 2007 onwards as an alternative to the maximum net asset value test. It is a lot easier to apply and therefore taxpayers would normally look to this first before the net asset test.

To be a ‘small business entity’ the taxpayer must carry on a business and satisfy the $2m aggregated turnover test.

Carrying on a business

Whether or not a business is being carried on will normally be quite obvious and I don’t intend to talk about it here at great length (though it could make an interesting post for another time). However, if you are unsure whether or not a business is carried on I would suggest looking at the table at paragraph 18 in Tax Ruling TR 97/11 as a starting point.

It is quite common (at least amongst my clients) for one entity to own most of the assets while another entity (an affiliate or connected entity) runs the business. In the past this caused problems but under the current rules the small business entity test will still be satisfied where:

  • The entity that carries on the business is a small business entity and is connected to or is an affiliate of the taxpayer (i.e. the asset holding entity)
  • The taxpayer does not carry on a business itself (other than in partnership) and
  • The asset is used in the business carried on by the taxpayer’s affiliate or connected entity

 $2m aggregated turnover test

This test looks at whether the taxpayer, together with any connected entities and affiliates (a detailed explanation of what these terms mean will come in my next post) had, or is expected to have, a turnover of $2m or less. The test can be satisfied by looking at:

  • Actual turnover in the prior income year
  • Actual turnover in the current income year (i.e the year in which the CGT event happened) or
  • Estimated turnover in the current income year (obviously determined before the year is over).

Only one of these three needs to be satisfied.


Turnover is the GST-exclusive amount of income derived in the ordinary course of business, excluding from dealings with connected entities and affiliates (to avoid double-counting). It would typically include sales and interest from business bank accounts but wouldn’t include capital gains, dividends and passive rental income.

Some other points to note;

The method of determining turnover you choose must be used for all other connected entities and affiliates. You can’t choose a different method for each entity.

If using the estimated turnover method (i.e. at the start of the income year it appears likely that the aggregated turnover will be less than $2m) the onus is on the taxpayer to prove that the estimate is sound. The Explanatory Memorandum lists factors to consider when making this estimate.

The taxpayer cannot use the estimated turnover test if they carried on a business in the previous two income years and in both those years turnover exceeded $2m.

If the business was carried on for only part of the income year the taxpayer should use a reasonable estimate of what the turnover would have been if it were carried on for the entire year.

In my next post I’ll go into some detail about the aggregated part of the aggregated turnover test. That is, what are connected entities, what are affiliates, what gets included and what gets excluded.


My favourite type of turnover – an apple turnover