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Small business CGT concession eligibility to tighten

The government announced last year that it intended to tighten the eligibility factors for the CGT concessions that are generally available to small businesses. The CGT concessions are important for qualifying businesses in that they can defer, reduce or remove liability to CGT.

Specifically, the proposed amendments (which have been released in exposure draft form) will limit the current CGT concessions to assets that are used by a small business or ownership interests in a small business.

The amendments include additional basic conditions that must be satisfied for a business to apply the CGT concessions to a capital gain arising in relation to a share in a company or an interest in a trust (labelled the “object entity”).

Broadly, the conditions require that:

  • if the taxpayer does not satisfy the maximum net asset value test, the relevant CGT small business entity must have carried on a business just prior to the CGT event;
  • the object entity must have carried on a business just prior to the CGT event;
  • the object entity must either be a CGT small business entity or satisfy the maximum net asset value test (applying a modified rule about when entities are “connected with” other entities), and
  • the share or interest must satisfy a modified active asset test that looks through shares and interests in trusts to the activities and assets of the underlying entities.

The above webpage also provides a link to explanatory material.

Labelling the change an integrity, the government says: “This will prevent the concessions applying to non-business assets owned by an entity that carries on a small business. It will also prevent structuring so that ownership interests in larger businesses pass the eligibility tests.”

Under the proposed amendments, the measure would be backdated to apply from 1 July 2017. The changes do not touch the current definition of a small business entity as it applies to the CGT concessions. The existing tests of group turnover of less than $2 million or group assets under $6 million still apply.

Early release of super savings under review

On 8 December 2017 the government announced that Treasury will conduct a review of the rules governing the early release of superannuation benefits, including for victims of crime compensation.

The government says the rules governing early release of superannuation benefits have not changed substantially since 1997. “The superannuation system has come a long way since then and it is important to ensure the arrangements remain fit for purpose,” says Kelly O’Dwyer, Minister for Revenue and Financial Services.

The issues paper that was released (the paper can be found here) examines the key issues related to the early release of superannuation benefits under compassionate grounds and severe financial hardship grounds.

The paper also examines whether, and the circumstances in which, an offender’s superannuation assets should be available to cover the needs of victims of domestic violence and pay compensation to victims of crime.

Treasury recognises however that the review of the early release of super needs to be framed by guiding principles. The paper says that every ground of release reflects a trade-off between members’ immediate needs and the long-term objective of building retirement income. “This will never be easy. However, highlighting these trade-offs is important when considering whether the rules should be amended.”

Below are three proposed guiding principles for this review.

  • Preservation: Superannuation benefits should generally be preserved to provide income in retirement to substitute or supplement the Age Pension. Early access to superannuation for other purposes is inconsistent with the preservation principle.
  • Genuine hardship: There will be circumstances where the benefits of early access to superannuation for an individual will exceed the benefits of preserving balances until retirement. The challenge for policy-makers is to identify the point at which the need for compassion outweighs the broader policy objective of the superannuation system.
  • Last resort: Early release of superannuation benefits should generally be a last resort where other sources of financial support have been exhausted. It is not an appropriate replacement for existing health and income support policies.
  • Fair and effective: The rules should be able to be administered fairly and effectively; that is, the rules should be sufficiently clear and objective to allow applications to be dealt with in a timely and consistent fashion, and ensure that similar cases can be treated alike. Rules that are highly subjective in nature will necessarily cause more red tape, expense and difficulty for applicants, trustees and government.

 

What types of legal expenses are tax deductible?

When a legal expense is incurred in relation to the operation of a business to produce assessable income, it is generally allowable as a deduction. Exceptions are when the legal fee is capital, domestic or private in nature, if it is specifically excluded by another section of income tax legislation, or is incurred in earning exempt and non-assessable non-exempt income.

In this regard, for individuals incurring legal fees, the expense incurred would not be deductible unless there is a clear nexus with the expense being incurred in deriving assessable income (for example, for an investment property). In other cases, the expense may be private in nature so a deduction would not be available in any case.

The following types of legal expenses are not deductible under the general deductibility provisions because they are of a capital or private nature. Instead they are made deductible under a specific provision in tax law:

  • the preparation of an income tax return, the disputing of a tax assessment and the obtaining of professional tax advice
  • the preparation of lease documents
  • certain borrowing expenses, and
  • certain mortgage discharge expenses.

Other common legal expenses are considered below.

Business lease expenses
The cost of preparing, registering and stamping a lease is deductible if the taxpayer is using or will use the property for earning assessable income. The lease payments themselves will be deductible under the general deduction rules, and are therefore subject to special prepayment rules.

Valuation expenses
If valuation fees are paid to help decide whether to buy a business, these are generally capital costs and not an allowable deduction. However if the valuation is used to support an application to borrow money for use in the business, those expenses can be claimed as borrowing costs immediately if under $100 or over the life of the loan, or five years from the date of the loan, whichever is shorter.

Fines and breaches of law
Deductions are specifically denied for fines or penalties (however described) that are imposed as a consequence of a breach of any Australian or foreign law. This rule does not apply to administratively imposed penalties such as the general interest charge (which the ATO applies to unpaid tax liabilities) and penalties for underestimating GST instalments. However, while the fines and penalties may be specifically disallowed, the costs incurred in defending an action may be deductible.

Evicting a tenant
A taxpayer may acquire premises (all or a portion of) that were leased to a tenant of the former owner. Any expenses incurred trying to evict the tenant will not be deductible. This expense becomes part of the cost of acquiring the property and a capital expense for income tax purposes. Arguably, the expense could form part of the “cost base” of the property, being expenditure of a capital nature incurred in establishing the taxpayer’s title to, or a right over, the asset. However a private ruling for a particular set of circumstances could be required.

Legal expenses that can be claimed
Circumstances where legal fees are usually deductible include:

  • negotiating current employment contracts (including disputes) in respect of existing employment arrangements
  • defending a wrongful dismissal action bought by former employees or directors
  • defending a defamation action bought against a company board
  • arbitration in settling disputes (depending on the facts)
  • recovering misappropriated funds of the business
  • opposing neighbourhood developments that are likely to adversely affect the taxpayer’s business (depending on the facts of the case)
  • evicting a rent-defaulting tenant
  • recovering wages of an employee as a result of a dishonored cheque
  • defending a libel action provided the case was directly related to comments in pursuit of the company’s business
  • pursuing claims for workers compensation, and
  • defending the unauthorised use of trademarks (depending on the facts of the case).

Legal expenses that cannot be claimed
Circumstances where legal fees are generally not deductible include:

  • the cost of negotiating employment contracts with a new employer
  • defending driving charges (regardless of whether the transgression occurred while driving on company business)
  • defending charges of sexual harassment or racial vilification that occurred in the workplace
  • eviction of a tenant whose term had expired
  • resisting land resumption, rezoning or disputing the amount of compensation, and
  • disputing redundancy payout or seeking to increase the amount of any redundancy payout.