• Maximum net asset value test

    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

    There is a limit of $5 million on the net value of the CGT assets that you and certain related entities can own and still qualify for the small business CGT concessions. This $5 million limit is called the maximum net asset value test. The $5 million limit is not indexed for inflation.

    You satisfy the maximum net asset value test if the total net value of CGT assets owned by:

    does not exceed $5 million just before the CGT event that results in the capital gain for which the concessions are sought.

    Attention

    The assets of your small business CGT affiliates, or entities connected with your small business CGT affiliates, are included in the maximum net asset value test only if those assets are used, or held ready for use, in a business carried on by you or by an entity connected with you (but not an entity connected with you only because of your small business CGT affiliate).

    End of attention

    Example

    Colin operates a newsagency business as a sole trader. His wife Sally carries on her own florist business, which is unrelated to the newsagency business. Sally owns the land and building from which the newsagency is conducted and leases it to Colin. Sally is Colin's small business CGT affiliate.

    In determining whether he satisfies the maximum net asset value test, Colin includes the market value of the land and building owned by Sally (because it is used in his newsagency business) but does not include Sally's other assets used in her florist business (because they are not used in the newsagency business).

    Additional test for partnerships

    If you are a partner in a partnership and the CGT event happens in relation to a CGT asset of the partnership (for example, a partnership asset is disposed of), the net value of the CGT assets of the partnership also must not exceed $5 million.

    Attention

    This additional test does not apply if a partner in a partnership disposes of an interest in a partnership asset (and the other partners retain 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.

    End of attention

    Meaning of net value of CGT assets

    The net value of the CGT assets of an entity is:

    Sum of the market values of those assets

    less

    any liabilities of the entity that are related to those assets

    Assets to be included in determining the net value of CGT assets are not restricted to business assets and include all CGT assets of the entity, unless the assets are specifically excluded (as noted below).

    Although gains from depreciating assets may be treated as income rather than capital gains, depreciating assets are still CGT assets and are therefore included when calculating the net asset value.

    Assets excluded from the net value of CGT assets

    Some interests in connected entities

    To avoid double counting when calculating the net value of your CGT assets, you disregard any shares, units or other interests (apart from debt) that you hold in an entity connected with you or your small business CGT affiliate. This is because the net value of the CGT assets of the connected entity is already included in the test.

    Assets solely for personal use, superannuation assets

    If you are an individual, also disregard the following assets when working out the net value of your CGT assets:

    • assets being used solely for your personal use and enjoyment, or that of your small business CGT affiliate
    • rights to amounts payable out of a superannuation fund or an approved deposit fund
    • rights to an asset of a superannuation fund or an approved deposit fund, and
    • insurance policies on the life of an individual.
    Individual's own home if incidental income-producing use

    If an individual's own home is not used solely for personal use and enjoyment only because of some incidental income-producing use, the home is also excluded from the maximum net asset value test.

    However, if the individual had incurred interest on a loan taken out to purchase the home and would have been able to be deduct at least some of that interest from their assessable income, the total market value of their home is included in the maximum net asset value test, even if it is predominantly used for private purposes.

    The individual would be entitled to deduct part of the interest on money they borrowed to buy the home if:

    • part of the home is set aside exclusively as a place of business and is clearly identifiable as such, and
    • that part of the home is not readily adaptable for private use, for example, a doctor's surgery located within a doctor's home.

    Attention icon

    This is a hypothetical interest deductibility test. If the individual did not actually incur any interest, the test looks at whether they would have been entitled to a deduction if they had taken out a loan to purchase their home.

    Direction icon

    More information

    Main residence exemption - the effect of using your home to produce income (NAT 10255)

    Example

    John is a sole trader. The market value of his CGT assets is as follows:

    Business premises

    Business goodwill

    Trading stock

    Plant

    Boat (used solely for personal use)

    Residence (used solely for personal use)

    $500,000

    $200,000

    $100,000

    $50,000

    $50,000

    $300,000

    There is a mortgage on the business premises of $400,000. John also borrowed $20,000 to buy the boat.

    John does not include the market value of his residence and boat, or the liability relating to the boat, when calculating the net value of his CGT assets. The net value of John's CGT assets is therefore $850,000 - $400,000 = $450,000.

    If John used his residence partially for income-producing purposes such that he would have been entitled to a deduction for interest if he had borrowed money to acquire the residence, he would include the market value of the residence in the net value of his CGT assets. For example, if he had a $100,000 mortgage on the residence, the net value of John's CGT assets would be $1,150,000 - $500,000 = $650,000.

    Who is a small business CGT affiliate?

    Your spouse, or child under 18 years, is a small businessCGT affiliate of yours.

    A person is also your small business CGT affiliate if they act, or could reasonably be expected to act:

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

    However, if you are a partner in a partnership, another partner is not your small business CGT affiliate only because that partner acts, or could reasonably be expected to act, in concert with you in relation to the affairs of the partnership.

    When is an entity connected with you?

    An entity is connected with another entity if:

    • either entity controls the other entity, or
    • both entities are controlled by the same third entity.
    Connected with - control of a partnership, company or trust (except a discretionary trust)

    An entity controls another entity if it, its small business CGT affiliates, or all of them together:

    • beneficially own/s or has/have the right to acquire beneficial ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) of any distribution of income or capital by the other entity, or
    • if the other entity is a company, beneficially own/s, or has/have the right to acquire beneficial ownership of, shares in the company that give at least 40% of the voting power in the company.

    Example

    Olivia and Jill conduct a professional practice in partnership. As they each have a 50% interest in the partnership they each control the partnership. The partnership is therefore connected with each partner, and Olivia and Jill are each connected with the partnership.

    Example

    Yusef is a sole trader. He also owns shares in a company that carry 50% of the voting power in the company. The net value of his CGT assets (apart from the shares in the company) is $3 million. In determining whether he satisfies the maximum net asset value test, Yusef must take into account the net value of his CGT assets ($3 million) and the net value of the company's CGT assets because the company is connected with him. He does not include the market value of his shares in the company in the net value of his CGT assets because this amount is already reflected in the net value of the company's CGT assets.

    Control where interest is at least 40% but less than 50%

    If an entity's control percentage in another entity is at least 40% but less than 50%, the Commissioner may determine that the first entity does not control the other entity if he is satisfied that a third entity (not including any small business CGT affiliates of the first entity) controls the other entity.

    For an entity to be controlled by a third entity, the third entity must also have a control percentage of at least 40% in the entity. That is, it must control the entity in the way described above. In working out the third entity's control percentage, the interests of any small business CGT affiliates of the third entity are taken into account.

    In other words, for the Commissioner to be able to determine that an entity does not control another entity, there must be a third entity that has a control percentage (including the interests of any small business CGT affiliates) of at least 40% in the other entity.

    Example

    X Co conducts a business and has 10 shareholders. Y Co owns 45% of the shares in X Co. The other shareholders each own between 2% and 20% of the shares in X Co. The shareholder holding 20% of the shares runs the company. All the shares have equal voting and distribution rights and none of the shareholders is a small business CGT affiliate of another shareholder.

    In this case, the next largest shareholder in X Co after Y Co owns 20%. As there is no third entity with a control percentage of at least 40%, the Commissioner cannot determine that Y Co does not control X Co.

    If there was a third entity with a control percentage of at least 40% (that is, there were two shareholders with a control percentage of at least 40%) it would be necessary to consider additional factors to determine if the third entity controls it. Such additional factors could include who is responsible for the day-to-day and strategic running of the company.

    Example

    Lachlan owns 45% of the shares in a private company. He plays no part in the day-to-day or strategic running of the business. Daniel owns the other 55% of the shares in the company. All shares carry the same voting rights and Daniel runs the company. Even though Lachlan owns 45% of the shares in the company, he would not be taken to control the company because the Commissioner would be satisfied that the company is controlled by Daniel.

    Alternatively, it is possible that both of the entities with a control percentage of at least 40% may control the company if such responsibilities are shared.

    Connected with - control of a discretionary trust
    Attention

    Proposed changes to the control test for discretionary trusts have now become law. They were previously announced by the government in Assistant Treasurer Media Release CO97/03 on 16 October 2003 and were introduced into Parliament in Tax Laws Amendment (2004 Measures No. 1) Bill 2004 on 19 February 2004. The new rules are set out below.

    Subject to certain transitional rules, the changes apply to CGT events happening after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999.

    End of attention
    Control by trustee

    An entity may control a discretionary trust if the entity, its small business CGT affiliates, or all of them together:

    • is/are the trustee of the discretionary trust (other than the public trustee of a state or territory), or
    • has/have the power to determine how the trustee makes distributions of income or capital to the beneficiaries of the trust.

    However, this will be the case only if certain beneficiaries are not taken to control the trust.

    If a beneficiary of a discretionary trust controls the trust and the beneficiary is not a small business CGT affiliate of the trustee, or of a person who has the power to determine how the trustee makes distributions, then the trustee or that other person will not also be taken to control the discretionary trust.

    Control by beneficiary

    The level of actual distributions made by a discretionary trust is used to determine who controls the trust. Subject to certain transitional arrangements, a beneficiary is taken to control a discretionary trust only if, for any of the four income years before the year for which relief is sought for a CGT event:

    • the trustee paid to, or applied for the benefit of, the beneficiary and/or their small business CGT affiliates (for example, their spouse or child under the age of 18) any of the income or capital of the trust, and
    • the amounts paid or applied were at least 40% (the control percentage) of the total amount of income or capital paid or applied for that income year (subject to the Commissioner's discretion where the control percentage is between 40% and 50%).

    Exempt entities and deductible gift recipients are not treated as controlling a discretionary trust regardless of the percentage of distributions made to them.

    To determine if a particular beneficiary controls a trust, amounts paid to or applied for the benefit of any of the beneficiary's small business CGT affiliates are also included when determining whether the beneficiary reaches the 40% threshold.

    Distributions of income and capital made to the same beneficiary are considered separately (that is, not added together) to determine if the beneficiary reaches the 40% threshold.

    Public entities can also be taken to control a discretionary trust if distributions to them meet the 40% control percentage. A public entity is a publicly traded company or unit trust, a mutual insurance company, a mutual affiliate company or a company in which all the shares are beneficially owned by one or more of those entities.

    Example

    The XY discretionary trust sold a business asset during the year ended 30 June 2004 and made a capital gain. The trust made the following percentage distributions of income and capital for the previous year (there were no distributions of any kind for any of the earlier years, nor did the trust have a tax loss in any previous year):

     

    2002-03

    Income

    Capital

    Mr X

    50%

    -

    Mrs X

    50%

    -

    Mr Y

    -

    50%

    Mrs Y

    -

    50%

    As Mr and Mrs X each received at least 40% of the total distributions of income from the trust they each control the trust. As Mr and Mrs Y each received at least 40% of the total distributions of capital from the trust, they also each control the trust.

    Example

    The Z discretionary trust sold a business asset during the year ended 30 June 2004 and made a capital gain. The trust made percentage distributions of income for the previous 4 years as follows (there were no distributions of capital and no tax losses for any year):

     

    1999-00

    2000-01

    2001-02

    2002-03

    Mrs Z

    100%

    -

    25%

    20%

    Mr Z

    -

    -

    25%

    -

    Child 1 (<18)

    -

    25%

    25%

    40%

    Child 2 (<18)

    -

    25%

    25%

    40%

    Exempt entity

    -

    50%

    -

    -

    All four prior years need to be examined to identify everyone who controls the trust.

    1999-00

    Mrs Z controls the trust as she received at least 40% of distributions. Mr Z also controls the trust because distributions to his small business CGT affiliates, eg, his spouse, are added to any distributions he receives to see if the 40% threshold is reached. Mr Z's control percentage is therefore 100%.

    2000-01

    Mr and Mrs Z each control the trust. Although neither received any distribution, the distributions made to each of their small business CGT affiliates (that is, their children under 18 years of age) are included to see if the 40% threshold is reached. Mr and Mrs Z therefore each have a control percentage of 50% and so control the trust. Although the exempt entity received at least 40% of the total distributions, it is not taken to control the trust.

    2001-02

    Again, Mr and Mrs Z each control the trust. The combined 50% distributions made to their children are added to their own 25% distribution to give them each a control percentage of 100%.

    2002-03

    Mr and Mrs Z each control the trust. The combined 80% distributions made to their children are added to their own distributions to give Mrs Z a control percentage of 100% and Mr Z 100%. As the children received at least 40% of the total distributions, they are also taken to control the trust.

    Accordingly, Mr Z, Mrs Z and each child control the trust.

    No distributions made because of tax loss

    The trustee of a discretionary trust may nominate up to four beneficiaries as being controllers of the trust for an income year for which the trust had a tax loss and for which the trustee did not pay or apply any income or capital of the trust.

    In such a case, the trust might not have had the funds to make a distribution, which would prevent it from being controlled in that year. The trustee may wish to make the nomination to ensure that a particular CGT asset is treated as an active asset for that year.

    The nomination must be in writing and signed by the trustee and each nominated beneficiary.

    Transitional rules

    As noted earlier, there are certain transitional rules that may apply in relation to the changes (reflecting their retrospective nature).

    1. Modification of the new control test for the 2001-02 and prior income years

    The new control test for discretionary trusts is based on actual distributions made for any of the four income years before the year in which the small business CGT concessions are sought.

    As a transitional rule (designed to reduce compliance costs), the control test is modified for CGT events happening in the 1999-2000, 2000-01 and 2001-02 income years. For these years, you have to take into account actual distributions made only in the particular year for which the small business concessions are sought. That is, you need to examine only the one year.

    Example

    The ABC discretionary trust sold a business asset during the year ended 30 June 2002 and made a capital gain. The trust made the following percentage distributions of income and capital for that year:

     

    2001-02

    Income

    Capital

    Mr A

    50%

    -

    Mrs A

    50%

    -

    Mr B

    -

    50%

    Mrs B

    -

    50%

    As Mr and Mrs A each received at least 40% of the total distributions of income from the trust, they each control the trust. As Mr and Mrs B each received at least 40% of the total distributions of capital from the trust, they also each control the trust.

    It is not necessary to examine the distributions made by the trust for any earlier year to determine if anyone else controls the trust.

    1. Choice for continued operation of former control test

    The new control test applies to CGT events happening after 11.45am, by legal time in the Australian Capital Territory, on 21 September 1999. You can choose a further transitional rule to apply for CGT events that happen before the end of the 2003-04 income year.

    In such a case, you can choose to apply the former control test for discretionary trusts (but do not need to take into account assets of potential beneficiaries that are exempt entities or deductible gift recipients). Under the former control test, all potential beneficiaries of a discretionary trust were taken to control the trust regardless of actual distributions (assuming they could potentially receive at least 40% of the total distributions of income or capital).

    You must choose to apply the transitional rule by the latest of:

    • the day you lodge your income tax return for the income year in which the CGT event happened
    • 30 June 2005 (12 months after the date of royal assent), and
    • a later day allowed by the Commissioner.

    The way you prepare your income tax return is sufficient evidence of making the choice.

    You might choose to apply the former control test to enable particular entities to be treated as connected entities so that an asset owned by one entity and used in another entity's business can be an active asset. In this case, the assets of all potential beneficiaries (except exempt entities and deductible gift recipients) must also be included in the trust's $5 million net asset test.

    Example

    A discretionary trust sold an asset during the year ended 30 June 2004 and made a capital gain. The asset had been used by one of the potential beneficiaries of the trust in a business they carried on. Neither that beneficiary nor any of their small business CGT affiliates had ever received a distribution from the trust.

    Under the trust deed, all the potential beneficiaries, including an exempt entity, are capable of receiving 100% of distributions. The trust makes a choice for the former control test to apply.

    Accordingly, all the potential beneficiaries (except the exempt entity) are taken to control the trust and hence are connected with the trust. The asset sold by the discretionary trust can be an active asset because it was used in the business of a connected entity. As well, the assets of all potential beneficiaries (except the exempt entity) must be included in the discretionary trust's $5 million net asset test.

    1. Extension of time to make choices

    The small business CGT concessions require you to make choices. Generally, a choice available under the CGT law must be made by the day you lodge your income tax return for the income year in which the relevant CGT event happened, or within such further time as the Commissioner allows.

    A transitional rule applies in relation to CGT events that happen before the date of Royal Assent (29 June 2004) for entities that become eligible to make a choice under the new rules in relation to those events.

    In such a case, the transitional rule allows you to make a choice by the latest of:

    • the day you lodge your income tax return for the income year in which the CGT event happened
    • 30 June 2005 (12 months after the date of royal assent), and
    • a later day allowed by the Commissioner.
    1. Extension of time to acquire replacement assets

    Under the small business rollover, you must generally acquire a replacement asset within the period starting one year before and ending two years after the relevant CGT event (or within such further period as the Commissioner allows). As well, the replacement asset must be an active asset when it is acquired, or by the end of two years after the CGT event.

    A transitional rule applies in relation to CGT events that happen before the date of Royal Assent (29 June 2004) for entities that become eligible to make a choice under the new rules in relation to those events.

    In such a case, the transitional rule extends the period for acquiring the replacement asset and the period within which the asset must be an active asset to the latest of:

    • two years after the last CGT event happened in the income year for which the entity obtained the small business rollover
    • 30 June 2005 (12 months after the date of royal assent), and
    • a later day allowed by the Commissioner.
    Connected with - indirect control of an entity

    The control tests for the 'connected with' rules are designed to look through business structures that include interposed entities. If an entity (the first entity) directly controls a second entity, and the second entity controls (whether directly or indirectly) a third entity, the first entity is also taken to control the third entity.

    Image of indirect control of an entity

    In the above figure, the small business entity controls Companies A and B but not Company C.

    Exception where interposed entity is a public entity

    The indirect control test does not apply if an entity controls a public entity and that public entity controls a third entity, unless the first entity actually controls the third entity (for example, because it holds 50% of the voting shares of the third entity).

    Example

    If an entity (E1) controls a public entity (E2) that in turn controls another entity (E3), E1 will not be deemed to control E3 merely because it controls E2. However, E1 will control E3 if, for example, E1 beneficially owns shares that carry a right to 50% of the voting rights in E3.

    Last modified: 10 Sep 2007QC 27357