Who is a spouse under the tax laws, and why does it matter?
If you run a small business through a company and you decide to sell it, you have the choice of either selling the business assets themselves (together with any goodwill) or selling your shares in the company.
Usually, such decisions are made on the basis of relevant commercial considerations (eg due diligence and future liability issues).
However, if you are seeking to access the CGT small business concessions on any sale - then you should also consider whether it is better to sell the business assets per se or the shares in the company.
While in principle, there should be no difference in terms of the CGT outcome in selling either, it may well be easier to access the concessions by adopting one approach over the other.
For example, if you sell the business assets at the company level you will need to find one or more controllers of the company (ie broadly someone with a 20% or more interest in it at the relevant time) in order to be able to access the concessions.
And, depending on the circumstances, this can be both easier and harder than it looks.
Furthermore, in case of the “retirement exemption”, it is necessary to actually pay any exempted capital gain to this controller in order to be able to use the concession (or to put it into their superannuation if they are under 55 at the relevant time).
On the other hand, if you can use the “15 year exemption”, it is enough that such a person exists - without the need to pay the exempted gain to them.
Most importantly however, if you choose to sell the shares in the company, the company itself must have certain attributes – the most important of which is that 80% or more of its assets (by market value) must be assets used in carrying on a business.
This, in turn, raises the thorny issue of how money in the bank is to be treated – and there is often a fine line between whether it is considered to be used in carrying on a business or not.
Furthermore, if the company has “controlling interests” in any other entity, then the assets of any such entity has to be also taken into account in determining if this test is met.
And, of course, as with the application of the CGT small business concessions in any circumstances, the “taxpayer’’ must satisfy either the $2m turnover test or the $6m maximum net asset value (MNAV) test.
And where shares or units are sold, the “taxpayer’’ is the individual who owns the shares and where the business assets are sold the “taxpayer” is the company or trust itself.
In either case, the tests can be difficult to apply because the “taxpayer’’ includes affiliates and connected entitled (ie related parties).
And by way of example, if you sell the business assets of a company and you use the $6m MNAV test, then any person who has a 40% or more shareholding in the company will be a connected entity and their assets (other than personal ones such as super and their home) will also have to be taken into account. Importantly, this can include investment properties and shares.
And then there is the difficult task of determining what liabilities relate to those assets for the purposes of this test – especially where the business assets are sold.
Suffice to say, the issues surrounding the question of whether you should sell the business assets of a company or the shares in them when seeking to apply the CGT small business concessions are complex.
Furthermore, the same issues arise in respect of deciding whether to sell the units in a unit trust that operates a small business or the assets of the business itself.
In any of these scenarios we are here to help – as this is a matter which clearly requires the expertise of a tax professional.
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