• Small business 50% active asset reduction

    You can reduce the capital gain on an active asset by 50% (in addition to the 50% CGT discount if you've owned it for 12 months or more).

    Find out about:

    See also:

    Interaction with other concessions

    If you don't qualify for the small business 15-year exemption, the small business 50% active asset reduction may apply to reduce the capital gain.

    Unlike the other small business concessions, the small business 50% active asset reduction applies automatically if the basic conditions are satisfied, unless you choose for it not to apply.

    You might prefer for it not to apply, and instead choose the small business retirement exemption or the small business rollover, if this gives you the best result for your circumstances. For example, a company or trust may make larger tax-free payments under the small business retirement exemption.

    Otherwise, the small business retirement exemption or the small business rollover (or both) may apply to the capital gain that remains after applying the small business 50% active asset reduction.

    Conditions you must meet

    To apply the small business 50% active asset reduction, you need to satisfy only the basic conditions. There are no further requirements.

    See also:

    Example: Small business 50% active asset reduction

    Lana owns a small parcel of land that she has used in her business for more than 12 months. She sells the land and makes a capital gain of $17,000. In the same year she also makes a capital loss of $3,000 from the sale of another asset.

    After offsetting her $3,000 capital loss against her $17,000 capital gain, Lana is left with a capital gain of $14,000. As she is eligible for the CGT discount, she can reduce the remaining capital gain by 50%:

    $14,000 × 50% = $7,000

    Lana qualifies for the small business 50% reduction because she meets the basic conditions. Therefore, she can reduce her capital gain by a further 50%:

    $7,000 − (50% × $7,000) = $3,500

    Lana may be able to disregard her capital gain further using the small business retirement exemption or defer it using the small business rollover.

    End of example

    Consequences of applying the reduction

    If you satisfy the basic conditions, the capital gain that remains after applying any current year capital losses and any unapplied prior year net capital losses, and the CGT discount (if applicable), is reduced by 50%.

    This means if you're an individual or a trust and you've applied the CGT discount and the small business 50% active asset reduction, the capital gain (after being reduced by any capital losses applied against it) is effectively reduced by 75% (that is, 50% then 50% of the remainder).

    Beneficiaries of trusts

    If a trust makes a capital gain, its net capital gain for the income year is generally calculated in the same way as for other entities – that is, by reducing any capital gains by any capital losses and then by any relevant concessions.

    The net capital gain is included in the net income of the trust. A beneficiary who is 'specifically entitled' to a capital gain will generally be assessed on that gain, regardless of whether the benefit they receive or are expected to receive is income or capital of the trust.

    Capital gains to which no beneficiary is specifically entitled will be allocated proportionately to beneficiaries based on their present entitlement to income of the trust estate (excluding capital gains and franked distributions to which any entity is specifically entitled). This is called the adjusted Division 6 percentage.

    There are special rules that enable concessions obtained by a trust to be passed on to the beneficiaries of the trust who are entitled to a share of the trust's net capital gain.

    A beneficiary must 'gross up' their share of any capital gain received from a trust by:

    • multiplying that amount by two, if the trust has applied either the CGT discount or the small business 50% active asset reduction, or
    • multiplying that amount by four, if the trust has applied both the CGT discount and the small business 50% active asset reduction.

    The beneficiary's share of the trust capital gains (grossed up if required) is then taken into account in the method statement for calculating the beneficiary's net capital gain to be included in their assessable income by:

    • the trust capital gains being firstly reduced by any capital losses of the beneficiary, and
    • any trust capital gain remaining being reduced by the CGT discount (unless the beneficiary is a company – see below) and the small business 50% active asset reduction, if the trust’s capital gain was reduced by these two concessions to arrive at the beneficiary’s net capital gain.

    A corporate beneficiary of a trust must gross up (as above) their share of any net capital gains received from a trust that have been reduced (by the trust) by the CGT discount. They are not entitled to reduce this grossed-up amount by the CGT discount because companies are ineligible for the CGT discount.

    Example: Beneficiary of trust

    The LemInvest unit trust makes a capital gain of $100,000 when it disposes of an active asset. LemInvest has no capital losses and satisfies all the conditions for the CGT discount and the small business 50% active asset reduction. The trust’s net capital gain is $25,000 (no other concessions apply).

    LemInvest has one individual beneficiary, Gert, who is presently entitled to the net income of the trust. She has a separate capital loss of $10,000.

    Gert works out her net capital gain as follows:

    Share of trust net capital gain

    $25,000

    Gross up this amount by multiplying by 4
    ($25,000 × 4)

    $100,000

     

     

    Deduct capital losses ($10,000)

    $90,000

    Apply 50% CGT discount ($90,000 × 50%)

    $45,000

    Apply 50% reduction ($45,000 × 50%)

    $22,500

    Net capital gain

    $22,500

     

    End of example

    See also:

    Fixed trust distributions and 50% active asset reduction

    If a beneficiary’s interest in a trust is fixed (for example, an interest in a unit trust), there are rules to deal with the situation where the trust distributes to the beneficiary an amount of capital gain that was excluded from the trust’s net income because it claimed the small business 50% active asset reduction.

    The distribution of the small business 50% active asset reduction amount is a non-assessable amount under CGT event E4.

    The payment of the amount will firstly reduce the cost base of the beneficiary’s interest in the trust. If the cost base is reduced to nil, a capital gain may arise in respect of the beneficiary’s interest in the trust. This capital gain may qualify for the CGT discount (after applying any capital losses) if the interest in the trust has been owned by the beneficiary for at least 12 months.

    If a beneficiary’s interest in a trust is not fixed (for example, the trust is a discretionary trust) there are no CGT consequences for the beneficiary.

    See also:

    Last modified: 17 Jul 2017QC 52289