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Capital gains tax continues to be the most common tax trap for Australian small businesses due to its broad scope, a tax specialist has warned.
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SMEs must be aware of CGT obligations, cautions tax expert
20 November 2024
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A tax specialist said capital gains tax (CGT) continued to be the most common trap for Australian SMEs as well as the determination of whether a small business was a CGT small business entity (SBE).
Tax Banter specialist Tiffany Douglas said SMEs must be aware of their CGT requirements to avoid being caught up by the tax trap.
A CGT SBE classified a small business with an aggregated turnover that was less than $2 million, or if the taxpayer passively owned an active CGT asset.
Douglas said small business owners needed to determine if they met the maximum net asset value test.
“The taxpayer might be looking at whether or not they can satisfy the maximum net asset value test,” she said.
“So, what we need to determine here is whether the net value of the CGT assets owned by the taxpayer and all of the entities connected or affiliated with them are less than $6 million just before the CGT event.”
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In the event of a sale, Douglas said, the CGT asset would also need to be determined if it was a share in a company or an interest in a trust.
When the maximum net asset value test was conducted, Douglas said once the taxpayer was connected or affiliated with their assets, then 100 per cent of their net CGT assets in that entity would need to be included.
All assets would need to be included, regardless of the taxpayer’s actual percentage ownership interest in that entity.
“Because it’s a snapshot test, we also need to be mindful of what is happening around the time of the CGT event,” Douglas said.
“Anything that might have been done to try and get within the concessions, which could potentially open up to scrutiny from the Tax Office with respect to calculating the net value of the CGT assets.”
Douglas said calculations came from the sum of the market values of the CGT assets and the market value of the asset immediately before the CGT event, not what taxpayers or the ATO would like the market value to be.
According to the ATO, accepted valuation principles should be applied on the basis that a taxpayer could be audited as if they were, it would be on them to demonstrate why the valuation methodology adopted was appropriate.
A common area taxpayers tended to get “tripped up” was the exclusion of assets used for personal use, enjoyment or if it had been used to derive income.
To avoid this trap, taxpayers would need to be aware that the asset must always be solely used for the purpose it was given and cannot be changed within the time of a CGT event.
“If we’re looking at the market net asset value test, just be mindful of asking the right questions and do everything on the basis that you’re going to be audited,” Douglas said.
“Make sure that you get all of the documentation together at the time of the transaction so that you’re not scrambling around trying to find it when the Tax Office starts asking questions.”
“If you want the Tax Office out of your hair, make it as easy for them as possible.”
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