Active asset test
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The active asset test is satisfied if:
- you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period detailed below, or
- you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7 1/2 years during the test period.
The test period:
- begins when you acquired the asset, and
- ends at the earlier of
- the CGT event, and
- if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) - when the business ceased.
The periods in which the asset is an active asset do not need to be continuous. However, they must add up to the minimum periods specified above, depending on the total period of ownership.
The asset does not need to be an active asset just before the CGT event.
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Jodie ran a florist business from a shop that she has owned for eight years. She ran the business for five years, and then leased it to an unrelated party for three years before selling. The shop satisfies the active asset test because it was actively used in Jodie's business for more than half the period of ownership - even though the property was not used in the business just before it was disposed of.
Cessation of a business
If the CGT event happens within 12 months after the business ceased, the test period can end when the business ceased.
This aspect of the active asset test allows some flexibility in the situation where a business is sold, or has otherwise ceased, and an asset previously used in the business is sold after that time. The asset only needs to be an active asset for half (to a maximum of 7 years) of the shorter test period during the total time the asset was owned.
If the CGT event happens more than 12 months after the business ceased, the test period ends either:
- when the CGT event happens, or
- when the business ceased if the Commissioner grants you an extension of time. Extension of time requests are considered on the merits of each case.
For the purposes of the active asset test, the cessation of a business includes the sale of a business. That is, it is not limited to a business that ends in the sense that no-one continues to carry it on but also includes a business that has ceased to be carried on by an entity because the entity has sold that business.
Laura purchased business premises in February 2003 and immediately started to carry on her business from the premises. Her business expanded and she moved to larger premises across the street in April 2006. She entered into a contract to sell the original premises in July 2006. The premises were an active asset for at least half the period beginning in February 2003 and ending just before the CGT event in July 2006. The active asset test is satisfied even though she had not ceased her business and the premises were not used or held ready for use in Laura's business just before the CGT event.
For the 2005-06 and earlier years, to satisfy the active asset test the CGT asset must have been an active asset just before the CGT event or just before the business ceased (if that happened in the 12 months before the CGT event, or longer if the Commissioner allowed). Following from the above example, the premises would not have satisfied the active asset test if Laura had sold the premises in the 2006 income year.
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Asset devolved to legal personal representative
When an individual dies, their legal personal representative or beneficiary can access the concessions - to the extent that the deceased would have been able to access them just before they died - if a CGT event happens to the assets in the hands of the legal representative or beneficiary within two years of the death of the individual. The Commissioner can extend this two year period.
If the deceased met the basic conditions just before death, the active asset 50% reduction, the small business roll-over, and the retirement exemption can be accessed. If the deceased was not 55, there is no requirement to pay the amount into a superannuation fund. The 15-year exemption can also be chosen if the deceased had met the requirements, except that it is not necessary for the CGT event to have happened in relation to the retirement of the individual.
Continuing time periods for active asset test for involuntary disposals
There are modified rules to determine if the active asset test is satisfied for CGT assets acquired or transferred under the rollover provisions relating to assets compulsorily acquired, lost or destroyed or to marriage breakdown (Subdivisions 124-B and 126-A of the ITAA 1997 respectively).
If you acquired a replacement asset to satisfy the rollover requirements for the compulsory acquisition, loss or destruction of a CGT asset, the replacement asset is treated as if:
- you acquired it when you acquired the original asset, and
- it was an active asset at all times when the original asset was an active asset.
If you have a CGT asset transferred to you because of a marriage breakdown, and the capital gain arising from that transfer was rolled over under the marriage breakdown rollover provisions, for purposes of the active asset test you can choose whether to:
- include the ownership and active asset periods of your former spouse, or
- commence the ownership and active asset periods from the time the asset was transferred to you.
If you choose to include your former spouse's ownership and active asset periods of the CGT asset, that asset is treated as if it had been:
- acquired by you when your former spouse acquired the asset, and
- an active asset of yours at all times when the asset was an active asset of your former spouse.
Modified active asset test for CGT event D1
A modified active asset test applies if you make a capital gain from CGT event D1 (about creating rights in another entity).
The active asset test requires you to own the CGT asset before the CGT event happens. However, under CGT event D1, the relevant CGT asset (the rights) are created in the other entity without you owning them so it would not be possible to satisfy the active asset test.
Accordingly, the test is modified to require the right you create that triggers the CGT event to be inherently connected with another CGT asset of yours that satisfies the active asset test.
Meaning of active asset
A CGT asset is an active asset if it is owned by you and is:
- used or held ready for use by you, your affiliate, your spouse or child under 18 years, or an entity connected with you, in the course of carrying on a business, or
- an intangible asset that is inherently connected with a business you, your affiliate, your spouse or child under 18 years, or another entity that is connected with you, carries on, for example, goodwill.
For the 2006-07 and earlier years a small business CGT affiliate included a spouse or child under 18 years. The new definition of 'affiliate' does not provide for spouses and children under 18 years to be affiliates automatically.
To ensure that an asset does not lose active asset status as a result of the above amendments, an asset held by a spouse or child under 18 years is treated as an asset held by an affiliate for the purpose of the active asset test.
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When is an asset 'held ready for use'?
For an asset to be held ready for use in the course of carrying on a business, it needs to be in a state of preparedness for use in the business and functionally operative. As such, premises still under construction or land, upon which it is intended to construct business premises, could not be said to be 'held ready for use' and would, therefore, not be active assets at that time.
Margaret carried on business at various customer on-site locations. She acquired some land with the intention of constructing premises in which to carry on her business. Soon after Margaret acquired the land she was approached by another party that was keen to acquire the land and accordingly she sold the land and made a capital gain. Margaret was only part way through the construction of the premises at that time.
In this situation, the land was not held ready for use by Margaret in the course of carrying on her business at any time. It was not in a state of preparedness from which Margaret could carry on her business. Accordingly, the land was not an active asset at any time.
Shares and trust interests may also be active assets
A CGT asset is also an active asset at a given time if you own it, and:
- it is either a share in a company that is an Australian resident at that time or an interest in a trust that is a resident trust for CGT purposes for the income year in which that time occurs, and
- the total of the following is 80% or more of the market value of all of the assets of the company or trust
- the market values of the active assets of the company or trust, and
- the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on, and
- any cash of the company or trust that is inherently connected with such a business.
Cash and financial instruments are not active assets, but they count towards the satisfaction of the 80% test provided they are inherently connected with the business.
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This means a share in a company or an interest in a trust is an active asset if the company or trust itself has active assets with a market value of at least 80% of the market value of all its assets. Including capital proceeds from any recent sale of active assets in the 80% test provides some flexibility where the total market value of the active assets of the company or trust temporarily drops below 80% between the time active assets are sold and new active assets acquired.
The active asset test requires a CGT asset to have been an active asset for at least half of a particular period, as outlined earlier. For example, for a share in an Australian resident company to meet this requirement, the company must satisfy the 80% test for that same period.
The 80% test will be taken to have been met:
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- where breaches of the threshold are only temporary in nature, and
- in circumstances where it is reasonable to conclude that the 80% threshold has been passed.
John sells an active asset that meets the basic conditions and makes a capital gain of $500,000. He acquired shares in Fruit and Veg Co, which runs his family business, as replacement assets. The shares in Fruit and Veg Co meet the 80% test and are, therefore, active assets.
Some time later, Fruit and Veg Co borrows money to pay a dividend, and fails the 80% test. Two weeks later the dividend is paid and the shares pass the 80% test again. For the two weeks, the shares are treated as active assets even though they do not pass the 80% test.
Jack and Jill are the only shareholders of Hill Water Supplies Pty Ltd, an Australian resident company that carries on a water supply business. The market values of the company's CGT assets are as follows:
Plant and equipment
Rental property (not an active asset)
The total market value of the company's active assets is $900,000 which is more than 80% of the total market value of all the company's assets. Jack and Jill's shares in the company are, therefore, active assets.
The company sells its water filtration plant (for its market value of $200,000) and then immediately contracts to purchase new plant, which is delivered and installed two months later. The funds from the sale are held in the company's bank account before being used to pay for the new plant.
In this situation, although the market value of the company's active assets may drop below the 80% mark, the $200,000 capital proceeds held in the form of debt pending the acquisition of the new plant are included in the calculation. This means the 80% test is satisfied.
Although gains from depreciating assets may be treated as income rather than capital gains, depreciating assets such as plant are still CGT assets and may, therefore, be active assets and included in the 80% test.
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Interests in holding entities
An interest in an entity that itself holds interests in another entity that operates a business may be an active asset, depending on the successive application of the 80% test at each level.
Ben owns 100% of the shares in Holding Co which, in turn, owns 100% of the shares in Operating Co (both are resident companies). The only assets of Holding Co are the shares in Operating Co and all of Operating Co's assets are active assets.
As Operating Co satisfies the 80% test, the shares owned by Holding Co in Operating Co are active assets. As those shares are the only assets owned by Holding Co, Holding Co also satisfies the 80% test. Therefore, the shares owned by Ben in Holding Co are also active assets.
If Ben sold the shares in Holding Co, all the small business concessions may potentially apply to any gains made.
If Holding Co sold its shares in Operating Co, the small business concessions may apply as Ben is a CGT concessional stakeholder in Operating Co as well as having a small business participation percentage in Holding Co of at least 90%.
Also, if Operating Co sold its active assets, Operating Co may be entitled to the small business concessions as Ben is a significant individual and CGT concessional stakeholder in Operating Co as a result of his direct and indirect small business participation percentage. For more information, see the significant individual requirements.
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Certain assets cannot be active assets
The following CGT assets cannot be active assets (even if they are used, or held ready for use, in the course of carrying on a business):
- shares in companies or interests in trusts, other than those that satisfy the 80% test outlined above
- financial instruments - such as bank accounts, loans, debentures, bonds, futures and other contracts and share options (unless they are inherently connected with a business, in which case they count towards the satisfaction of the 80% test)
- assets whose main use is to derive interest, an annuity, rent, royalties or foreign exchange gains (unless the main use for deriving rent was only temporary or the asset is an intangible asset that you have substantially developed or improved so that its market value has been substantially enhanced), and
- shares and trust interests in widely-held entities unless held by a CGT concession stakeholder in the widely-held entity.
Trade debtors are not considered to be financial instruments for the purposes of the active asset exclusions. Rather, they are a business facilitation mechanism that assists in the conduct of the business and are inherently connected with the business. Accordingly trade debtors can be included in the value of active assets when calculating the 80% test.
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Main use to derive rent exception
As already noted, an asset whose main use is to derive rent (unless that main use is only temporary) cannot be an active asset. This is so even if the asset is used in the course of carrying on a business.
Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. The term 'rent' has been described as referring to the payments made by a tenant/lessee to a landlord/lessor for exclusive possession of the leased premises. As such, a key factor in determining whether an occupant of premises is a lessee paying rent is whether the occupier has a right to exclusive possession.
If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises are not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are not likely to be rent.
An asset that is leased to a connected entity or affiliate for use in its business may still be an active asset. It is the use of the asset in that entity's business that will determine the active asset status of the asset.
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Rachael owns five investment properties which she rents to tenants under lease agreements that grant exclusive possession. The lease terms vary from six months to two years. The properties are not active assets because they are mainly (only) used by Rachael to derive rent. It is irrelevant whether Rachael's activities constitute a business.
Michael owns a motel (land and buildings) which he uses to carry on a motel business. The motel provides room cleaning, breakfast, in-house movies, laundry and other services as part of the business. Guests staying in the motel do not receive exclusive possession but simply have a right to occupy a room on certain conditions. The usual length of stay by guests is between one and seven nights. The motel would be an active asset because its main use is not to derive rent.
Last modified: 30 Jun 2009QC 27964