To qualify for any of the small business CGT concessions, you must first satisfy several basic conditions.
- the maximum net asset value test
- the active asset test, and
- if the CGT asset is a share in a company or an interest in a trust, one of these additional basic conditions must be satisfied just before the CGT event:
- the entity claiming the concession must be a CGT concession stakeholder in the company or trust, or
- the 90 per cent test.
(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. This value can be positive, negative or nil. The $5 million limit isn't indexed for inflation.
The maximum net asset value test allows the net asset value of an entity to be reduced by provisions for annual leave, long service leave, unearned income and tax liabilities.
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 maximum net asset value test only counts the assets of each relevant partner and not the assets of the partnership as a whole.
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
- if you are an individual, your own home to the extent that it is reasonable having regard to the amount that the home has been used to produce assessable income. This will take into account the length of time and the percentage of income producing use. The percentage of private use is multiplied by the current market value and this amount is not included. If the home has never had any income producing use, the value is not included at all.
Example: calculating the net value of assets
The market value of Lana's CGT assets is:
Land use 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 50% for income producing activity with a market value of $600,000) |
$600,000 |
Total |
$1,050,000 |
Lana borrowed $20,000 to buy the boat.
Lana doesn't include the market value of her boat, or the liability relating to the boat, when calculating the net value of her CGT assets.
Lana includes 50% of the value of her home representing the income producing percentage
Therefore, the net value of her CGT assets is:
$1,050,000 − $350,000 = $700,000.
End of exampleDepreciating assets
Even though gains from depreciating assets may be treated as income (rather than a capital gain), depreciating assets are CGT assets and are 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
- 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 exampleMore information
For more information about the meaning of control in relation to partnerships, companies and trusts, and about the maximum net asset value test, see Advanced guide to capital gains tax concessions for small business 2006–07 (NAT 3359).
(b) The active asset test
This test requires the CGT asset to be an active asset for:
- 7 1/2 years if owned for more than 15 years
- half of the period of ownership if owned for less than 15 years.
In addition, the asset does not need to be an active asset just before the CGT event.
The period of ownership begins when the asset is acquired and ends at the earlier of:
- the time of the CGT event
- if the small business ceases within 12 months of the event (or any longer time that the Commissioner allows), when the business ceased.
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, a small business CGT affiliate or a connected entity of yours, carries 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, for example, 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.
Therefore, Lana satisfies the active asset test.
End of exampleMore information
(c) If the CGT asset is a share in a company or an interest in a trust, one of these additional basic conditions must be satisfied just before the CGT event:
- the entity claiming the concession must be a CGT concession stakeholder in the company or trust, or
- the 90 per cent test.
CGT concession stakeholder
An individual is a CGT concession stakeholder of a company or trust if they are a significant individual, or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust.
This participation percentage can be held directly or indirectly through one or more interposed entities. The percentages are worked out in the same way as for the significant individual test.
Significant individual test
The significant 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.
An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. The 20% can be made up of direct and indirect percentages.
An entity's direct small business participation percentage in a company is the percentage of:
- voting power that the entity is entitled to exercise
- any dividend payment that the entity is entitled to receive
- any capital distribution that the entity is entitled to receive.
If an entity has different percentages in a company, their participation percentage is the smaller or smallest percentage. The same applies for a trust.
Example: a significant individual
Lana has shares that entitle her to 30% of any dividends and capital distributions of Bean Co. The shares do not carry any voting rights.
Lana's direct small business participation percentage in Bean Co is zero per cent.
End of exampleAn entity's indirect small business participation percentage in a company or trust is calculated by multiplying the entity's direct participation percentage in an interposed entity by the interposed entity's total participation percentage (both direct and indirect) in the company or trust.
An indirect interest can be held through one or more interposed entities.
There are also rules about when an individual is a significant individual of a fixed trust (for example, unit trust) or a discretionary trust.
90 percent test
This test only applies if there is an interposed entity between the CGT concession stakeholders and the company or trust in which the shares or interests are held.
The interposed entity satisfies the test if 90 per cent of the participation percentages in that entity are held by CGT concessions stakeholders of the company or trust in which the shares or interests are held.
As with the significant individual test, the participation percentage can be held directly or indirectly through multiple interposed entities.
More information
See Advanced guide to capital gains tax concessions for small business 2006–07 (NAT 3359) for more information about the rules for fixed and discretionary trusts, and about the significant individual, CGT concession stakeholder and 90 per cent tests.