There has been a great deal of activity over the past 12 to 24 months in the SME merger and acquisition space. Smaller businesses being acquired by larger businesses, smaller businesses merging and even some larger trade sales whereby multi-nationals swallow up profitable SME’s.
Reasons stretch from simply improving market share, diversification and more commonly, being able to access staff, be they skilled or unskilled, to overcome the current workforce shortages.
As a result, business owners who are selling out are looking to the CGT Small Business Concessions (“the Concessions”) to determine whether they can qualify to reduce or even eliminate, the capital gain arising from the sale.
As many would be aware, there are a number of conditions that must be satisfied in order for the Concessions to apply, however a relatively new condition was introduced in 2018 that significantly limits the ability of business owners who sell shares in a company or units in a unit trust.
One of these new conditions requires that the underlying SME company or trust (the business entity being sold) must either be a CGT Small Business Entity (SBE) or satisfy the $6 Million Maximum Net Asset Value (MNAV) test in relation to the capital gain. The measure is intended to prevent the concessions being available for interests in entities that are carrying on a business that is not a small business as it has either substantial aggregated turnover or has significant net assets.
If we consider the CGT SBE test, that requires that the business entity have a turnover below$2 million (in the current or prior year) and in our experience, most businesses that still consider themselves small businesses have more than the $2 million turnover threshold, that threshold having been introduced into the tax law over 14 years ago.
In 2016, the then Government increased the SBE turnover threshold to $10 million for most SBE tax concessions, but not to access the CGT Concessions. This stayed at $2 million, where it began back in 2008.
This makes satisfying this part of the condition extremely difficult for a “growing” SME business.
The second part of the condition, the $6 million MNAV Test suffers from the same “threshold creep” affecting the SBE threshold.The $6 million threshold was also introduced from the 2008 year, having previously been set at $5 million of net assets.
In applying, these conditions today, business owners need to ensure that the company or unit trust in which they are selling shares or units meets at least one of the two additional conditions:
1. It has an aggregated business turnover of less than $2 million; or
2. It has a Net Asset Value of less than $6 million
This is regardless of how many shareholders or unitholders there are and their respective ownership interests.
With the growth of many businesses, coupled with spiraling inflation, both the SBE and the MNAV thresholds are in dire need of updating, or their owners will not have the opportunity to access these raft of concessions that were introduced with the express objective of encouraging the continued investment in small businesses and to support the retirement of many hard working small business owners. If you are considering the sale of part or all of your small business or are considering a change in how your business operates, you need to consider how these thresholds will impact your future tax position.
If you would like to discuss the above matters further, please contact your advisor.