Daniel Cole
Managing Director
Commercial and Succession Planning
The Federal Government has announced two major concessions to its proposed tax changes anticipated to commence from 1 July 2027; the first being that small businesses turning over up to $10 million would be eligible for a 50 percent concession on capital gains when selling CGT ‘active assets’, this being a new CGT concession by lifting the eligibility threshold for businesses with aggregated turnover of above $2 million up to a limit of $10 million; secondly the government announcing that testamentary discretionary trusts established for genuine testamentary purposes will be exempt from the minimum 30 percent trust tax.
Subject to meeting existing eligibility criteria if you are an individual, partnership, company or trust then a series of four small business CGT concession may be available that can be applied to reduce, disregard or defer some or all of a capital gain derived from an active asset that has been disposed of or transferred and that asset or assets have been used by or in connection with a small business which qualifies as an eligible entity.
To be an eligible entity and access the current small business CGT concessions the asset being disposed of must be an ‘active asset’, and one of the following basic conditions must be met:
You are a CGT small business entity with an aggregated turnover of $2 million.
You are not running a business (other than as a partner), but your asset is used in connection with your entity’s small business.
You are a partner in a partnership that is a small business entity with a qualify partnership interest or asset.
You meet the maximum net asset value test, currently set at $ 6 million.
If the small business entity qualifies as an eligible entity, then, the available CGT concessions are the:
small business 15-year exemption;
small business 50 percent active asset reduction;
small business retirement exemption; and
small business rollover.
Bearing in mind that the details are still unclear, today’s announcement proposes to permit the application of only one of the above four eligible small business CGT concessions on the disposal of active assets for businesses turning over more $2 million, this being the 50 percent active asset reduction on any capital gains derived on qualifying assets sold in connection with a business with a turnover of up to $10 million.
In relation to the Federal Government’s announcement to introduce a 30 percent minimum tax on the taxable income of discretionary trusts from 1 July 2028, today’s announcement carves out testamentary discretionary trusts used for “genuine testamentary purposes” from the minimum 30 percent tax.
This is welcomed relief for families looking to establish or leave in place estate plans involving the future creation and use of discretionary testamentary trusts upon death of a testator, which, but for the announcement would have likely resulted in a major limitation and reduction in the use of this effective estate planning tool due to the adverse tax outcomes that could have resulted from a minimum 30 percent tax on trusts.
Discretionary testamentary trusts are an effective tool in estate planning granting Will makers flexibility in the future control and administration of their estate assets to ensure that their assets are adequately protected and maintained for the benefit of their beneficiaries.
To what extent and circumstance genuine testamentary purposes shall be deemed to apply remains unclear, however for now this creates some clarity as to the government’s intentions with the tax changes with further critical details still to come.
We will continue to monitor developments and update our communications as further details emerge. In the meantime, if you would like to discuss these proposed changes and what they may mean for you or your estate planning, please do not hesitate to contact our team on 5445 3333.
