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The ATO is consistently picking up errors with small business CGT claims due to the complexity of the rules, warns BDO.
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Small business CGT concessions ‘one-way ticket to an ATO review’
05 September 2023
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Small business CGT claims are proving to be a significant target for ATO reviews with small businesses struggling to understand and comply with some of the more complex aspects of the provisions, according to accounting firm BDO.
BDO partner, tax, Mark Molesworth said despite the small business CGT concessions being designed for businesses at the lower end of the business spectrum, the provisions are incredibly complex in this area.
“They’re designed for people with less than $6 million in net assets or for businesses turning over less than $2 million. For a services business, $2 million might be a fairly sizeable business but if its business selling products then $2 million in turnover is likely to be at the micro-business level,” said Mr Molesworth.
“So you’re dealing with the less sophisticated end of the business spectrum in general but with some of the most complex parts of the legislation including tracing provisions for ownership and different definitions of what constitutes control.”
The complexity of these small business CGT rules has also led the ATO to release a number of tax rulings on some of the more confusing parts of the provisions including connected entities and whether a control relationship exists.
“So even the Tax Office I think is seeing them as confusing. That’s also consistent with our experience in practice where if you lodge a tax return and tick the box that says I’ve claimed the small business CGT concessions that’s a one-way ticket to an ATO review,” said Mr Molesworth.
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“If the Tax Office is seeing a return on its audit program just by auditing the entire universe of people who claim the [small business CGT] concessions, then it’s a fair indication that they’re complex and hard to deal with. People typically don’t go into these things trying to get them wrong, they usually get them wrong by accident because they’re complex.
“That’s not a criticism of the Tax Office, that’s the reality that people are getting it wrong and the Tax Office needs to be picking up on that to ensure a level playing field. However, it is also an indication about the complexity of the rules and the fact that they are hard to apply and that people are continually getting them wrong.”
Mr Molesworth said that simpler rules were needed at the small end of the market so that small business owners could comply without needing to spend considerable money for complex tax advice.
Some of the areas that cause confusion with the rules are around what entities should be included or excluded in the combined turnover or the combined asset calculation, he said.
“People also forget that an asset held for private use and enjoyment can be excluded but only if it’s held solely for private use and enjoyment,” said Mr Molesworth.
Issues can also arise where taxpayers rely on outdated valuations for the $6 million turnover test.
“People will say to their accountant, I bought this rental property for $600,000 and it’s got a mortgage of $500,000 so the net asset is only worth $100,000. What nobody thinks about is that if you bought it for $600,000 three years ago, that’s not worth $600,000 anymore, it might even be $900,000 and that extra $300,000 suddenly makes a big difference,” said Mr Molesworth.
Tax advisors should ensure they’re getting their documentation right before they make the claim for the concessions, he said.
“Taxpayers are well advised to have the file of information ready to go because when the Tax Office letter comes and gives you 28 days to provide that information it can take a while to organise a real estate agent to give you that valuation,” said Mr Molesworth.
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