Clayton’s tax cuts served to business

THE Federal Government has served small businesses operating as trusts or incorporated structures Clayton’s tax cuts, says Institute of Chartered Accountants in Australia principal consultant on tax change Ken Traill.

The government has proposed capital gains tax cuts of 50 per cent on the marginal tax rate for the sale of assets held for more than twelve months and a CGT holiday on the sale of business assets held for more than fifteen years to fund the owner’s retirement.

The CGT holiday is due to take effect in July, being the fifteenth anniversary of Australia’s CGT regime.

However, these cuts only apply to individuals. Companies and entities are still likely to draw the full CGT rate.

There are more than 427,000 trusts in Australia and many are owned by small businesses. From 1 July 2001 these will be treated as companies.

Tax consultant Graham Harrison said currently discretionary trusts were taxed in more concessional ways.

Mr Harrison was deputy commissioner of tax in Perth and took part in the Ralph Review of Business Taxation.

Mr Traill said the government’s CGT rate cuts made it more attractive to hold assets in the name of individuals rather than as assets of trusts or companies.

Insight Business Partners principal and former Society of CPAs Small Business Centre of Excellence chairman Colin Beavis said the government’s CGT changes would only “suit 5 per cent to 10 per cent of our clients”.

Mr Traill said small business owners operating as trusts or companies seeking to move their assets to benefit from the government’s CGT cuts would change ownership of the asset.

“Change of ownership involves stamp duty and means capital gains tax must be paid at the current rate – not the new lower rate,” he said.

Mr Harrison said business owners would have to decide whether it was worth putting assets outside the liability protection offered by some company structures.

Small Business Development Corporation managing director George Etrelezis said, most small business owners welcomed the CGT relief in the Ralph Review.

“It is healthy the review recognised small business as a sector,” Mr Etrelezis said.

However, even individuals face some hidden surprises in the proposed CGT package.

Mr Harrison said indexation and averaging have been removed.

“With the current CGT regime CPI indexation was taken into account. Since 1 October indexation has gone,” he said.

“Also, low income earners have lost the protection of averaging.

“If the one-off sale of an investment asset threatened to put the owner into a higher tax bracket, the gain could have been averaged to prevent that.”

Besides the proposed cuts to business, the government has also put in some CGT sweeteners for foreign investors.

Mr Harrison said the government was trying to attract money sitting in US slush funds.

“They need to invest in eligible ventures – at the higher risk end of the market such as high tech projects – to not draw any CGT,” he said.

“Australia is very exposed on the investment front. It is a net capital importer so it relies heavily on investment from overseas.”