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  • Step 1 Determine whether you satisfy the basic conditions for the small business CGT concessions

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    To qualify for any of the small business CGT concessions, you must first satisfy several basic conditions. These conditions are in the form of three tests, namely:

    1. the maximum net asset value test
    2. the active asset test, and
    3. the controlling individual test. This test applies only where the CGT asset is a share in a company or interest in a trust, and the individual claiming the concession is a CGT concession stakeholder in the company or trust.

    (a) The maximum net asset value test

    To pass this test, you and your related entities must not own assets with a total net value of more than $5 million just before the CGT event that results in the capital gain.

    The net value of the CGT assets of an entity is the total market value of its assets, less any liabilities relating to those assets. The $5 million limit isn't indexed for inflation.

    If you are a partner in a partnership and the CGT event happens in relation to a CGT asset of the partnership (for example, disposal of a partnership asset), the net value of the CGT assets of the partnership also can't be more than $5 million.

    This isn't the case if only one of the partners in a partnership is disposing of an interest in a partnership asset (that is, other partners are retaining their interest in the partnership asset). This is because a partner's interest in a partnership asset is a CGT asset of the partner and not of the partnership.

    What assets are not included?

    Do not include the following assets when calculating the net value of your CGT assets:

    • shares, units or other interests (apart from debt) held in any entities connected with you or your small business CGT affiliates (because the net value of the CGT assets of connected entities has already been included)
    • any assets of a small business CGT affiliate or an entity connected with a small business CGT affiliate that are not used, or held ready for use, in a business carried on by you or by an entity connected with you (unless the entity is connected with you only through your small business CGT affiliate)
    • if you are an individual, assets that are solely for your personal use (or the personal use of your CGT affiliates) or superannuation assets, and
    • if you are an individual, your own home, provided that you wouldn't be entitled to a tax deduction for interest if you had taken out a loan to purchase it. If you are entitled to a deduction, the total market value of your home is included in the maximum net asset value test, even if you use it mainly for private purposes.

    Example: calculating the net value of 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 (used solely for personal use)

    $300,000

    Market value

    $750,000

    Lana borrowed $20,000 to buy the boat.

    Lana doesn't include the market value of her home and boat, or the liability relating to the boat, when calculating the net value of her CGT assets.

    The net value of her CGT assets is therefore:

    $750,000 − $350,000 = $400,000

    If Lana used her home partially for income-producing purposes and would have been entitled to a deduction for interest if she had borrowed money to purchase it, she would include the market value of the residence in the net value of her CGT assets. If there was a $100,000 mortgage on the home, the net value of Lana's CGT assets would be:

    $700,000 − $100,000 = $600,000

    End of example
    Depreciating assets

    Even though gains from depreciating assets may be treated as income (rather than a capital gain), depreciating assets are CGT assets and taken into account for the maximum net asset value test.

    What are related entities?

    Related entities include:

    • any of your small business CGT affiliates
    • any entities connected with you, and
    • any entities connected with a small business CGT affiliate.

    A small business CGT affiliate includes your spouse or child under 18 years, or any person (including a company) that acts or could reasonably be expected to act:

    • in accordance with your directions or wishes, or
    • in concert with you.

    An entity is 'connected with' another entity if:

    • either entity controls the other, or
    • both entities are controlled by the same third entity.

    Example: the maximum net asset value test

    For the maximum net asset value test, Lana includes the market value of the land and building owned by her husband Max ($500,000), less any related liability ($400,000 mortgage). She does this because the land and building are used in her manufacturing business.

    But she doesn't include Max's other assets used in his florist business because they aren't used in her manufacturing business.

    Accordingly, the net value of the CGT assets of Lana's small business CGT affiliate (that is, her husband Max) to be included is:

    $500,000 − $400,000 = $100,000.

    There are no entities connected with Lana.

    As the net value of Lana's CGT assets and those of related entities doesn't exceed $5 million, she satisfies the maximum net asset value test.

    End of example

    More information:

    See Advanced guide to capital gains tax concessions for small business (NAT 3359) for more information about the meaning of control in relation to partnerships, companies and trusts, and about the maximum net asset value test.

    (b) The active asset test

    This test requires the CGT asset to be an 'active asset' at a particular time and for half a particular period.

    Broadly, if you have not ceased your business and you have owned the asset for less than 15 years, the CGT asset must be an active asset:

    • just before the CGT event, and
    • for at least half of the period of ownership.

    If the asset has been owned for more than 15 years, it needs to be an active asset for at least half of the 15-year period ending at the time of the CGT event (or when your business ceased, if earlier).

    There are modified rules for CGT assets acquired or transferred under the rollover provisions relating to assets compulsorily acquired, lost or destroyed, or those relating to marriage breakdown.

    A CGT asset is an active asset if it is owned by you and is:

    • used or held ready for use by you, a small business CGT affiliate, or an entity connected with you, in the course of carrying on a business, or
    • an intangible asset inherently connected with a business you carry on, for example, goodwill.

    In some circumstances, a share in a company or an interest in a trust can also be an active asset. However, certain CGT assets can't be active assets, even if they are used or held ready for use in the course of carrying on a business. Examples of assets that can't be active assets include financial instruments such as loans, bonds, share options and assets whose main use is to derive rent.

    Example: the active asset test

    Lana has used the land in her business for at least half the period she owned it, that is, for two out of the three years she owned it. Further, she was using the land in her business just before she sold it.

    Lana therefore satisfies the active asset test.

    End of example

    More information:

    (c) The controlling individual/CGT concession stakeholder test

    The controlling individual test is different from the control tests used to determine if an entity is 'connected with' another entity for the purposes of the $5 million maximum net asset value test.

    This test is a basic condition only if the asset from which the capital gain was made is a share in a company or an interest in a trust. (However, some of the concessions have further controlling individual requirements.)

    A company or trust satisfies the controlling individual test if it had at least one controlling individual just before the CGT event.

    An individual is a controlling individual of a company if the individual holds interests in shares (apart from redeemable shares) that carry between them:

    • the right to exercise at least 50% of the voting power in the company, and
    • the right to receive at least 50% of any distribution of income and capital that the company may make.

    If a company has no individual shareholders it will not have a controlling individual.

    Example: a controlling individual

    Lana's uncle Joe conducts his own business (through Company X) entirely separate to Lana's business. Joe owns shares carrying 60% of the voting and distribution rights in Company X and is thus a controlling individual of the company.

    If Joe owned 50% and his wife Anne owned 50%, they would both be controlling individuals of the company.

    On the other hand, if Joe and Anne owned 40% each and their daughter Clare owned the remaining 20%, there would be no controlling individuals and the company would not satisfy the controlling individual test.

    End of example

    There are also rules about when an individual is a controlling individual of a fixed trust (for example, unit trust) or a discretionary trust.

    A CGT concession stakeholder of a company or trust means:

    • a controlling individual of the company or trust, or
    • in some cases, a spouse of a controlling individual.

    A company or trust will have two, one or no CGT concession stakeholders. It will not have a CGT concession stakeholder if it doesn't have a controlling individual. For example, if three brothers have equal interests in a company or trust, there will be no CGT concession stakeholders because there are no controlling individuals.

    Example: the controlling individual/CGT concession stakeholder test

    As the land Lana sold wasn't a share in a company or interest in a trust, the third basic condition, the controlling individual/CGT concession stakeholder test, doesn't apply to her.

    Accordingly, Lana satisfies the basic conditions for the small business CGT concessions.

    Most of the concessions have further specific conditions, which Lana must now consider.

    End of example

    More information:

    See Advanced guide to capital gains tax concessions for small business (NAT 3359) for more information about the rules for fixed and discretionary trusts, and about the controlling individual/CGT concession stakeholder test.

    Last modified: 14 Jul 2020QC 17086