To be eligible for the small business CGT concessions your asset must pass the active asset test among other conditions.
An asset passes the active asset test if it has been an active asset of yours for at least:
- 7.5 years during the test period (if you've owned it for more than 15 years)
- half of the test period (if you've owned it for 15 years or less).
The test period begins when you acquired the asset and ends at whichever occurs first:
- the capital gains tax (CGT) event relating to the asset
- the business ceases or is sold, if the CGT event occurred 12 months or less after this.
You can apply for an extension of time if you dispose of the asset more than 12 months after the business ceases or is sold.
The period in which the asset is your active asset during the test period does not need to be continuous so long as the total length of time adds up to the minimum period or more.
Example: meeting the active asset test
Jodie ran a florist business from a shop she owned for 8 years. She ran the business for 5 years.
She then leased the shop to an unrelated party for 3 years before selling it.
The shop meets the active asset test because it was actively used in Jodie’s business for more than half the period of ownership, even though it was not used in the business just before it was sold.End of example
A CGT asset is an active asset if you (or your affiliate or entity connected with you) use it, or hold it ready for use, in running a business (or if it is an intangible asset, it is inherently connected with the business).
An asset whose main use is to derive rent, interest, an annuity, royalties, foreign exchange gains usually cannot be an active asset. However, the asset can be active if either:
- the main use for deriving rent was only temporary
- it is an intangible asset whose market value has substantially increased as a result of improvement or development undertaken by you.
Example: intangible asset considered active asset
In 2018, Jasminka opens a restaurant called Dossier and registers the name in NSW.
The concept proves to be very popular and in 2019 Jasminka registers the name Dossier Australia wide. She also registers the Dossier logo as a trademark. During this time, she licenses the use of the name in a number of cities.
In 2023 Jasminka sells the Dossier trademark.
In this situation, the Dossier trademark would be an active asset. This is because the work Jasminka did in opening the original restaurant, together with her efforts in protecting, marketing and licensing 'Dossier', is considered substantial development so that its market value has been substantially increased.End of example
When an asset is ‘held ready for use’
For an asset to be held ready for use in running 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 on which you intend to construct business premises, cannot be said to be 'held ready for use' and would, therefore, not be active assets at that time.
The following assets cannot be active assets:
- assets whose main use is to derive:
- rent (unless use for deriving rent was only temporary, or it is an intangible asset whose market value has substantially increased due to improvement or development you have undertaken)
- an annuity
- foreign exchange gains.
- subdivided vacant land
- shares in companies or interests in trusts (unless they meet the 80% test)
- shares and trust interests in widely held entities (unless held by a CGT concession stakeholder in the widely held entity)
- financial instruments such as:
- bank accounts
- futures and other contracts and share options.
When an asset's main use is to derive rent (unless such use is temporary) it is not considered an active asset. This is the case even if the asset is used in running a business.
Whether an asset's main use is to derive rent depends on the circumstances of each case. A key factor in determining whether an occupant of premises is a lessee paying rent is whether they have a right to exclusive possession. Other relevant factors to consider in regard to exclusive possession include the degree of control retained by the owner and the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities.
For example, if premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent. 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.
All uses of an asset are considered in determining what the main use of the asset is and, therefore, whether it is an active asset. However, personal use of the asset by you or an individual who is your affiliate is not considered in determining the main use of the asset.
The use of the asset to derive rent from a third party (an entity not an affiliate or connected with the asset owner) will be considered use to derive rent, even if that entity uses the asset in their business. This is because the use of the asset by the asset owner is to derive rent.
However, use of the asset by a relevant entity (an entity that is an affiliate or connected with the asset owner) is treated as the use by the asset owner, even if the asset owner receives rent from the relevant entity for the use of that asset. This means, if the relevant entity uses the asset:
- in its business, that use is treated as use by the asset owner to run a business
- to derive interest, rent, royalties, or foreign exchange gains from an entity that is a third party, that use is treated as use by the asset owner to derive passive income.
Example: asset's main use is to derive rent
Rachael runs a business renting properties for short periods of time on an online platform. The terms and conditions state that tenants have exclusive possession of the properties. This means the tenant has permission to exclusively use and occupy the property. Rachael offers no additional services to the tenants during their stay and tenants are expected to provide their own linen and clean the property before vacating.
The properties are not active assets because their main use is to derive rent. Therefore, Rachael would not meet the basic eligibility conditions for the small business CGT concessions.End of example
Example: asset's main use is not to derive rent
Tanya owns a motel (land and buildings), which she uses to run a business.
As part of the business, the motel provides room cleaning, breakfast, laundry and other services.
Guests staying in the motel do not receive exclusive possession. But simply have a right to occupy a room under certain conditions.
The usual length of stay by guests is between one and seven nights.
The motel is an active asset because its main use is not to derive rent.End of example
Example: an asset's mixed use
Michael owns land, which holds 3 industrial sheds.
He uses one shed (45% of the land by area) to conduct a motorcycle repair business.
He leases the other 2 sheds (55% of the land by area) to unrelated third parties.
The income derived from the motorcycle repair business is 80% of the total income (business plus rentals). This is derived from the use of the land and buildings.
In determining main use of the land, a range of factors must be considered.
In this case, a substantial (although not a majority) proportion (45%) of the land is used for business purposes.
The business proportion of the land derives the vast majority (80%) of the total income.
Given all the circumstances, we consider the main use of the land is not to derive rent. Therefore, the land is an active asset.End of example
When the original parcel of land is subdivided into new blocks, these are considered new, separate assets.
If land is subdivided into both vacant land and land used to run a business, the new subdivided blocks of vacant land are not active assets.
For CGT purposes, when an asset is split into 2 or more assets you are the owner of both the original asset and the new assets, the split is not a CGT event. You work out the cost base and reduced cost base of each new asset as set out in subdividing and combining land.
Example: subdivided land assets
Tom acquired 10 hectares of land as a single parcel 20 years ago.
He uses 3 distinct areas of land for different purposes:
- 20% is used for his business
- 20% is used for domestic purposes and contains his main residence
- 60% is vacant and has not been used or held ready for use.
Tom decides to subdivide all the land into residential blocks. Tom is not running a land development business so the subdivided blocks will not be trading stock. After the subdivision is complete, Tom will sell each block, including those created out of the vacant part of the land.
The new subdivided blocks are considered to be acquired by Tom when the original parcel was acquired. The disposal of a subdivided block is treated as the disposal of an asset in its own right, and not as a disposal of part of an asset (the original land parcel).
The new subdivided blocks created out of the:
- 20% part of land where Tom ran the business will meet the active asset test when they are sold. This is because they were owned for more than 15 years and were active assets for at least 7.5 years.
- 20% which contains his main residence is exempt from CGT because Tom meets the main residence exemption eligibility conditions.
- 60% part of the vacant land are new assets that have never been used or held ready for use in any business. Therefore, they are not considered active assets.
Shares in a company that is an Australian resident at the time you own them or an interest in a trust that is a resident for CGT purposes for the income year in which you own that interest can be active assets if they meet the 80% test.
The test is met if the market value of the company or trust's active assets and financial instruments and cash (those that are inherently connected with the business) make up at least 80% of the market value of all of the company or trust’s assets.
Inherent connection requires more than just some form of connection between the cash or financial instrument and the business. Examples of things inherently connected to a business include:
- a permanent or characteristic attribute of the business — for example, goodwill or trade debtors (invoices owed to you by customers)
- excess funds the business has as a result of
- a temporary spike in trading activity
- the sale of a business asset
- a financial instrument that is inherently connected with a business that the owner of the financial instrument runs (rather than any business a related entity runs).
Example: loan to a related company
Archimedes Pty Ltd is a manufacturing business. It lends $300,000 to a related company, Galileo Pty Ltd, to acquire assets for business use between both companies.
The loan is made between members of a corporate group as part of the overall financing of the group.
However, the loan is not a permanent or characteristic attribute of the business (which is manufacturing, not the acquisition of assets). It is a financial instrument but not inherently connected with the business of manufacturing.
Therefore, the $300,000 loan is included in the total market value of all the assets, but not included as an active asset.
The market value of Archimedes Pty Ltd.'s active assets is $700,000 (without the loan). The market value of all its assets (including the loan) is $1 million.
The 80% test calculation is:
$700,000 ÷ $1 million = 70%
This means that the 80% test is not met.End of example
Temporary breaches of the 80% test
The 80% test will be considered to be met where the total market value of the active assets falls below 80% of the total market value of the company or trust and:
- this is only temporary in nature
- it is reasonable to conclude that the 80% threshold has been passed.
Depreciating assets, such as plant, are CGT assets. They can be active assets and included in the 80% test.
Example: temporary breach due to borrowing money
Joshua owns a fruit shop. He sells an active asset that meets the basic CGT eligibility conditions. He makes a capital gain on the asset.
Later, he acquires shares in Fruit and Veg Co as replacement assets. Fruit and Veg Co runs his family business.
The shares Joshua acquired meet the 80% test. As a result, they are active assets.
Several years later, Fruit and Veg Co borrows money to pay a dividend and fails the 80% test.
Two weeks later they pay the dividend and the shares pass the 80% test again.
For the 2 interim weeks, the shares Joshua acquired in Fruit and Veg Co are treated as active assets.End of example
There are modified rules to determine if the active asset test is met for CGT assets acquired or transferred under the rollover provisions relating to assets compulsorily acquired, lost or destroyed, or to marriage and relationship breakdown.
If you acquired a replacement asset to meet the rollover requirements for the involuntary disposal of a CGT asset, the replacement asset is treated as if:
- you acquired it when you acquired the original asset
- it was an active asset (at all times) when the original asset was an active asset.
If a CGT asset is transferred to you from a relationship breakdown and you roll over the capital gain that arises from that transfer, you can choose whether to:
- include the ownership and active asset periods of your former spouse
- commence the ownership and active asset periods from the time the asset was transferred to you.
If you choose to include the ownership and active asset periods of your former spouse, the asset is treated as if it had been:
- acquired by you when your former spouse acquired the asset
- an active asset of yours (at all times) when the asset was an active asset of your former spouse.
The active asset test normally requires you to own the CGT asset before the CGT event occurs.
However, when CGT event D1 occurs (creating rights in another entity), the relevant CGT asset (the rights) is created in the other entity without you owning it. Therefore, it would not be possible to meet the active asset test. In this case, the active asset test is modified and requires the right you create (that triggers the CGT event) to be inherently connected with another CGT asset that meets the active asset test.
You may be eligible for the CGT concessions to the same extent that the deceased would have been just prior to their death if you receive the asset as a:
- beneficiary of a deceased estate
- legal personal representative (LPR)
- surviving joint tenant
- trustee or beneficiary of a testamentary trust (trust created by a will).
You will be eligible for the concessions where the CGT event relating to the asset occurs within 2 years of the individual’s death.
Otherwise, the active asset test applies to you in the normal way for any capital gain made on a sale of the assets after the 2–year time limit. This means that if you do not continue to run the deceased's business, or use the asset in another business, after the 2 years, the active asset test may not be met, and the small business concessions may not be available.
We can extend the 2–year time period in certain situations.To be eligible for the small business CGT concessions your asset must pass the active asset test among other conditions.