• When shares and trust interests are 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
      • 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.
       

    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 (and inherently connected financial instruments and cash) with a market value of at least 80% of the market value of all its assets.

    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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    Inherent connection

    Inherent connection necessarily requires something more than just some form of connection between the financial instrument and the business. A thing might be regarded as inherently connected to a business when it is a permanent or characteristic attribute of the business, for example, goodwill, or trade debtors. Where a business is holding excess funds arising from a temporary spike in trading activity or the sale of a business asset, the excess funds might also reasonably be regarded as inherently connected with the business. A financial instrument must be inherently connected with a business that the owner of the financial instrument carries on, rather than any business a related entity carries on.

    Example

    Archimedes Pty Ltd carries on a manufacturing business. It lends $300,000 to a related company, Galileo Pty Ltd, to acquire various assets to be used in the businesses of both companies. However, a loan (being a financial instrument) a company makes to a related entity to fund the acquisition of assets is not considered to be a permanent or characteristic attribute of the business the company carries on. As such, loans made between members of a corporate group as part of the overall financing of the group are not considered to be inherently connected with the business the lender carries on. Accordingly, the loan by Archimedes Pty Ltd to Galileo Pty Ltd is not included in the numerator (but is still included in the denominator) of the 80% test calculation in determining whether the shares in Archimedes Pty Ltd are active assets. If the market value of Archimedes Pty Ltd's active assets is $700,000 such that the market value of all its assets (including the loan) is $1,000,000, the relevant calculation is:

    $700,000 ÷ $1,000,000 = 70%

    Therefore the 80% test is not satisfied and the shares in Archimedes Pty Ltd are not active assets.

    End of example

    The active asset test requires a CGT asset to have been an active asset for at least half of a particular period. 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:

    • 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.

    Example

    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, as a result, they are 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.

    End of example

     

    Example

    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:

    Business premises

    $400,000

    Goodwill

    $100,000

    Trading stock

    $100,000

    Plant and equipment

    $300,000

    Rental property (not an active asset)

    $100,000

    Total

    $1,000,000

    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. Therefore, Jack and Jill’s shares in the company are 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 has dropped below the 80% mark, the company's bank account holding the $200,000 is a financial instrument inherently connected with the company's business and is therefore included in the calculation. This means the 80% test remains 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.

    End of example

    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.

    Example

    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, then Holding Co also satisfies the 80% test. As a result, 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 because 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%.

    If Operating Co sold its active assets, Operating Co may be entitled to the small business concessions because 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 test.

    End of example

    See also:

    Last modified: 17 Jul 2017QC 52282