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Tax complexity must be addressed - Editorial

Thursday 25 February, 2010 by Roger Timms - Head of Tax and Superannuation

Australia's tax laws contain some generous concessions, not the least of which are the small business CGT concessions, the availability of which might result in 100% of the gain arising on the sale of a business being tax-free (the 15-year exemption) or, perhaps, a gain of up to $1,000,000 being tax-free from the sale of a husband and wife owned business asset (the retirement exemption).

Used appropriately, concessions of this type can maximise the assets available to small business proprietors in their retirement. However, despite this rosy picture, we pose the question: are all taxpayers who should be benefitting from these concessions doing so, and are taxpayers who do not qualify nevertheless utilising the concessions in the mistaken belief they are entitled to do so? Inevitably, yes.

The difficulty with the provisions lies in their complexity, particularly those which apply when multiple entities are involved. For example: consider a family business operated in a unit trust with a discretionary trust holding the units, whilst the land and buildings housing the business are owned by a family investment trust, the beneficiaries of which are Dad, Mum and their adult son (a simple asset protection strategy being adopted).

If the business and the land and buildings are sold and capital gains arise in the unit trust and the family investment trust , in order to access the concessions it will be necessary to consider such concepts as:

• is there a ‘controller' of the family investment trust
• are there ‘CGT concession stakeholders' of the unit trust
• what are the ‘small business participation percentages' of the family members in the discretionary trust, and
• are the unit trust and the family investment trust ‘connected entities'?

These can be difficult questions to correctly answer, even for experienced tax agents.

It would be taken as a given that all taxpayers who meet the legislative requirements should obtain the benefit of the concessions, and to the maximum extent possible ensure that taxpayers do not inadvertently access concessions for which they do not qualify. In these circumstances a strong case can be made for a rewrite of the small business CGT concession provisions with an emphasis on simplification.

The taxation policies recently adopted by Taxpayers Australia included a policy specifically directed at a rewrite of the tax laws in order to achieve simplified and understandable laws which achieve their desired objectives with the minimum of cost and difficulty for taxpayers. 

The small business CGT concessions are a good example of why the policy is worthy of adoption by the government. It is unlikely that the Henry Review of the tax system will address issues involving the complexity of the tax laws and therefore the impetus for change must come from elsewhere.