Small Business Entity Concessions

If the business you are buying earns less than $2 million then it is a small business entity (SBE). This means that when you look to sell the business you can use the SBE CGT concessions.

You need to ensure that you meet the tests of being a CGT concession stakeholder in order to access these concessions.  When you set up your entity you should be considering these factors when working out the share splits and calculating the small business participation percentages

Where the CGT asset is a share in a company or an interest in a trust, one of these additional basic conditions must be satisfied just before the CGT event:

  • you must be a CGT concession stakeholder in the company or trust, or
  • CGT concession stakeholders in the company or trust together have a small business participation percentage in the interposed entity of at least 90% (the 90% test).
An individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust, which is greater than zero. This participation percentage can be held directly or indirectly through one or more interposed entities. The percentages are worked out in the same way as for the significant individual test.
An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. The 20% can be made up of direct and indirect percentages.

An entity’s direct small business participation percentage in a company is the percentage of:

  • the voting power that the entity is entitled to exercise (except for jointly owned shares)
  • any dividend payment that the entity is entitled to receive, or
  • any capital distribution that the entity is entitled to receive.

If an entity has different percentages for each of these points above in a company, their participation percentage is the smaller or smallest percentage. The same applies to a trust.

For a trust, where entities have entitlements to all the income and capital of the trust, an entity’s direct small business participation percentage is the lower percentage of the income and capital of the trust that the entity is beneficially entitled to receive.

Where entities do not have entitlements to all the income and capital of a trust, and the trust makes a distribution of income or capital, an entity’s direct small business participation percentage in the trust is the percentage of:

  • distributions of income that the entity is beneficially entitled to during the income year, or
  • distributions of capital that the entity is beneficially entitled to during the income year.

If an entity has an entitlement to both the income and capital of the trust, then the entity’s direct small business participation percentage is the smaller percentage of the two. If the trust did not make a distribution of income or capital during the income year, it would not have a significant individual during that income year.

All a little complex to say the least and this is why your advisor at Forsyths can identify whether you have the right setup when it comes to eventually sell the business. You need everything in order to take advantage of any reductions in tax available to you.