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CGT mismatch will cause market distortion

Publication date: 31 Aug 97 | Source: THE TAX INSTITUTE

"The extension of the CGT small business rollover to shares announced by the Treasurer will create a market mismatch which will need to be urgently addressed by Government to avert significant market distortions", according to Taxation Institute of Australia President, Mr Richard Gelski.

The announcement will now allow small business owners to "roll-over" CGT liabilities when selling their business to buy a new (perhaps larger) business, by selling the shares in the operating company of their current business.

"This situation creates a simple but very significant problem for the smooth operation of the market," Mr Gelski said.

Owners wishing to take advantage of the small business CGT retirement exemption, under current rules, may only do so by selling the business, not the operating company. Under the rules proposed by the Treasurer for the extension of roll-over relief, small business owners who have sold the shares in their business' operating company won't be allowed to roll-over their CGT liability into businesses with goodwill, but they can roll-over their CGT liability into a company which operates a business with goodwill. "The result will be that there will be buyers wanting to buy businesses operated through a company, and sellers who want to sell their business but who need to retain the operating company," Mr Gelski said.

"This situation will distort the small business market because business owners wanting to retire will find it more difficult to sell their businesses, and those business owners who are able to sell the operating entity with their business may be able to command a premium."

According to Mr Gelski, there is a very simple solution to this problem which is to allow business owners eligible for the retirement exemption to be able to dispose of their business entity.

"Whilst this would add a further layer of complexity to an already complex piece of legislation, this was preferable to allowing market distortions to affect business owners," Mr Gelski said.