Maximum net asset value test
You qualify for step 1 of the small business CGT concessions if the total net value of CGT assets owned by you and certain entities does not exceed $6 million just before the CGT event for which the concessions are sought. The limit is not indexed for inflation.
You must include the net value of CGT assets owned by:
- you
- any entities connected with you
- any of your affiliates and entities connected with your affiliates
- but only if the assets are used, or held ready for use, in a business carried on by you or an entity connected with you
- don’t include an asset if it is used in the business of an entity that is connected with you only because of your affiliate.
Find out about:
See also:
Example
Colin operates a newsagency as a sole trader.
Colin's son, Simon, carries on his own florist business, which is unrelated to the newsagency business. Simon owns the land and building from which the newsagency is conducted and leases it to Colin. Simon also owns 100% of the shares in Simco Pty Ltd, which carries on a separate business. Simon is connected with Simco Pty Ltd because he controls the company. Simon regularly consults Colin for advice in his business affairs and acts according to Colin’s wishes – therefore, Simon is Colin’s affiliate.
To determine whether he satisfies the maximum net asset value test, Colin includes the market value of the land and building owned by Simon (because it is used in his newsagency business) but does not include Simon’s other assets used in his florist business (because they are not used in the newsagency business). Nor does Colin include Simco’s assets, because those assets are not used in his business and Simco Pty Ltd is only connected because of his affiliate, Simon.
End of exampleMeaning of 'net value'
The net value of the CGT assets of an entity is the sum of the market values of those assets less any liabilities of the entity that are related to those assets and provisions made for:
- annual leave
- long service leave
- unearned income
- tax liabilities.
The net value can be positive, negative or nil.
Partner in a partnership
If you're a partner in a partnership and the CGT event happens to an asset of yours or a CGT asset of the partnership (for example, disposal of a partnership asset), the maximum net asset value test would include:
- if you're connected with the partnership – all the assets of the partnership (excluding the value of your interest in the partnership)
- if you're not connected with the partnership – only your interest in the partnership (exclude the assets of the partnership as a whole).
Entities that hold shares or trust interests would calculate their net asset value in a similar way.
Assets to include
Assets to be included in determining the net value of the CGT assets are not restricted to business assets. They include all CGT assets of the entity, unless the assets are specifically excluded (see Assets to exclude).
In the case of a dwelling that is an individual's main residence, the individual only includes the current market value of the dwelling in their net assets to the extent that it is reasonable, having regard to the amount that the dwelling has been used to produce assessable income that gives rise to deductions for interest payments, or would give rise to deductions for interest if interest had been paid.
The individual would be entitled to deduct part of the interest on money they borrowed to buy the home if:
- part of the home is set aside exclusively as a place of business and is clearly identifiable as such, and
- that part of the home is not readily adaptable for private use – for example, a doctor’s surgery in a doctor's home.
This is a hypothetical interest deductibility test. If the individual did not actually incur any interest, the test looks at whether they would have been entitled to a deduction if they had taken out a loan to purchase their home.
If the dwelling has had some income-producing use, the percentage of income- producing use is multiplied by the current market value to work out the value of the dwelling that should be included. This will take into account the length of time and percentage of income-producing use of the dwelling.
Although gains from depreciating assets may be treated as income rather than capital gains, depreciating assets are still CGT assets and are included when calculating the net asset value.
Example
Ben owns a house that has a market value of $750,000 just before applying the net assets test. Ben has owned the house for 12 years:
- for the first three years, 20% of it was used for producing assessable income
- for the following two years, 40% was used for producing assessable income
- for two years, it was used solely as a main residence
- for the last five years, 10% was used for producing assessable income.
Ben’s dwelling has had 15.8% income-producing use:
- 3 ÷ 12 years × 20 = 5.0
- 2 ÷ 12 years × 40 = 6.7
- 2 ÷ 12 years × 0 = 0.0
- 5 ÷ 12 years × 10 = 4.1
Ben will include $118,500 in his net assets ($750,000 × 15.8%).
Ben has a liability of $500,000 attached to the house, therefore 15.8% ($79,000) of the liability is also included in the calculation of net assets.
End of exampleLiabilities to include
Liabilities to be included in determining the net value of CGT assets include:
- legally enforceable debts due for payment
- presently existing legal or equitable obligations to pay either a certain sum or ascertainable sums.
See also:
Amounts that are not included in liabilities for the purposes of determining the net value of CGT assets of an entity include:
- provisions for possible obligations to pay damages in a pending lawsuit
- provisions for liabilities in respect of an earn-out contract
- provisions for the guarantee of a loan
- provisions for long service and annual leave entitlements
- provisions for income and other taxes prior to liability arising
- accounting liabilities arising as a result of receiving prepaid income
- provisions in general, for such things as quantity rebate and the like.
Provisions for annual leave, long service leave, unearned income and tax liabilities are not within the meaning of the term 'liabilities' but are separately taken into account in determining the net value of CGT assets.
Liabilities related to assets
A liability must be related to the CGT assets of an entity to be taken into account in determining the net value of the CGT assets of the entity.
This includes liabilities directly related to particular assets that are themselves included in the calculation, for example, a loan to finance the purchase of business premises. It also includes liabilities not directly related to a particular asset but rather to the assets of the entity more generally – for example, a bank overdraft or other short-term financing facility that provides working capital for the operation of the business. However, liabilities that are directly related to an asset that is excluded from the net asset calculation cannot be included – but certain liabilities related to excluded interests in connected entities may be counted.
Example
Cool Tool Pty Ltd is selling its business. The assets and liabilities of the company are as follows:
Assets:
|
|
Plant and machinery
|
$1,500,000
|
Freehold premises
|
$3,500,000
|
Total assets
|
$5,000,000
|
Liabilities:
|
|
Mortgage (secured over the premises)
|
$2,000,000
|
Provision for leave of employees
|
$500,000
|
Provision for rebates
|
$200,000
|
Provision for possible damages payout
|
$100,000
|
Total liabilities
|
$2,800,000
|
Net assets:
|
$2,200,000
|
The net value of the CGT assets of the company is calculated as follows:
Assets:
|
|
Plant and machinery
|
$1,500,000
|
Freehold premises
|
$3,500,000
|
Total assets
|
$5,000,000
|
Liabilities:
|
|
Mortgage (secured over the premises)
|
$2,000,000
|
Provision for leave of employees
|
$500,000
|
Total liabilities
|
$2,500,000
|
Net value of CGT assets:
|
$2,500,000
|
The following items are not taken into account in working out the net value of the CGT assets of Cool Tool Pty Ltd because they are not within the meaning of the term 'liabilities':
- provision for possible damages payout
- provision for rebates.
End of exampleAssets to exclude
Some interests in connected entities
When calculating net value, you should exclude the shares, units and other interests (apart from debt) that you hold in an entity connected with you or your affiliate. This is because the net value of the CGT assets of the connected entity is already included in the test.
However, include any liabilities relating to these excluded interests in connected entities.
Non-business assets of affiliates or entities connected with affiliates
Include the net value of assets of your affiliates, and entities connected with your affiliates, only if the assets are used, or held ready for use, in a business carried on by you or an entity connected with you. However, don’t include an asset of your affiliate or an entity connected with your affiliate if it is used, or held ready for use, in the business of an entity that is connected with you only because of your affiliate.
Personal use and super assets
If you're an individual, you should disregard the following assets when working out the net value of your CGT assets:
- assets being used solely for your personal use and enjoyment, or that of your affiliate
- your own home, to the extent that you use it for private purposes (also, if your only other use is some incidental income-producing use, exclude your home from the net asset value test). If you've used part of your home to produce assessable income, you must make a reasonable apportionment
- rights to amounts payable out of a super fund or approved deposit fund
- rights to an asset of a super fund or approved deposit fund
- insurance policies on your life.
Where an asset is disregarded, any related liability is also disregarded because these liabilities are not related to an asset included in the net asset value calculation.
Example: Personal use assets
The market value of Lana’s CGT assets is:
Land used in business
|
$50,000
|
Business goodwill
|
$200,000
|
Trading stock
|
$100,000
|
Plant
|
$50,000
|
Boat (used solely for personal use)
|
$50,000
|
Home
|
$600,000
|
Total
|
$ 1,050,000
|
Lana borrowed $20,000 to buy the boat.
When working out the net value of her CGT assets, Lana does not include:
- the market value of her boat ($50,000)
- the liability for the boat.
Lana uses 50% of her home exclusively for income-producing activity. She includes 50% of the value of her home, representing the income-producing percentage, and does not include the other 50% ($300,000).
Therefore, the net value of her CGT assets is:
$1,050,000 − $350,000 = $700,000
End of exampleEffect of look-through earnout rights
Earnout arrangements are a way of structuring the sale of a business to deal with uncertainty about its value. The contract for the sale of a business (or assets of the business) provides for an initial lump sum payment by the buyer and a right to subsequent financial benefits that are contingent on the performance of the business for a specified period after the sale.
Working out the net value of your CGT assets for the purpose of the maximum net asset value test may require you to value an asset that is subject to a look-through earnout right.
However, depending on your situation you may be entitled to make a choice to treat the market value of the relevant CGT asset as one of the following:
- the first element of the cost base
- nil
- the total financial benefits provided, or
- the capital proceeds.
If such a choice is made and the look-through earnout right is also your CGT asset, you treat the market value of that right as if it were nil.
Next steps:
See also:
You may qualify for the small business CGT concessions if the total net value of CGT assets owned by you and certain entities does not exceed $6 million just before the CGT event for which the concessions are sought.