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  • Small business 50% active asset reduction

    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

    The rules covering the small business 50% active asset reduction are contained in Subdivision 152-C of the Income Tax Assessment Act 1997.

    Interaction with other concessions

    If you do not 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. For example, you might prefer for it not to apply and instead choose the small business retirement exemption or the small business rollover. Making this choice allows you to achieve 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 only need to satisfy the basic conditions. There are no further requirements.

    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 that if you are an individual or a trust and you have 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).

    Example 46

    Lana operates a small manufacturing business and disposes of a CGT asset that she has owned for three years and has used as an active asset of the business. She makes a capital gain of $17,000 from the CGT event, and qualifies for the CGT discount and for the small business 50% active asset reduction. Lana also has a capital loss in the income year of $3,000 from the sale of another asset. She calculates her net capital gain for the year as follows:

    $17,000 − $3,000 = $14,000

    $14,000 − (50% × $14,000) = $7,000

    $7,000 − (50% × $7,000) = $3,500

    Her net capital gain for the year is $3,500 (assuming the small business retirement exemption and the small business rollover do not apply). If Lana chooses the rollover or the retirement exemption, some or all of the remaining capital gain would be disregarded.

    End of example

    Rules for beneficiaries of trusts

    The rules for beneficiaries of trusts are contained in Subdivision 115-C of the Income Tax Assessment Act 1997.

    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, by reducing any capital gains firstly by any capital losses and then by any relevant concessions.

    The net capital gain is included in the net income of the trust. Presently entitled beneficiaries of the trust are assessed on their share of the net income of the trust, which includes a share of the trust’s net capital gain.

    There are special rules that enable concessions obtained by a trust to be passed on to the beneficiaries of the trust who are presently entitled to a share of the trust’s income.

    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:

    • the trust capital gains are firstly reduced by any capital losses of the beneficiary, and
    • any trust capital gain remaining is then reduced by the CGT discount (if the beneficiary is a type of entity eligible for the CGT discount – see below) and/or the small business 50% active asset reduction if the trust’s capital gain was reduced by those 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.

    The grossed-up capital gain is in addition to the beneficiary’s share of the trust’s net capital gain that is included in their share of the net income of the trust. Accordingly, the beneficiary is entitled to a deduction for that part of their share of the net income of the trust that is attributable to the trust’s net capital gain.

    Example 47

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

    Assume there is one individual beneficiary presently entitled to the net income of the trust. The beneficiary also has a separate capital loss of $10,000.

    The beneficiary works out their net capital gain as follows:

    Share of trust net capital gain

    $25,000

    Gross up this amount by multiplying by 4

    $100,000

    Deduct capital losses

    $10,000

    Subtotal

    $90,000

    Apply 50% CGT discount

    $45,000

    Subtotal

    $45,000

    Apply 50% reduction

    $22,500

    Subtotal

    $22,500

    Assessable capital gain

    $22,500

    Subtotal

    $47,500

    Deduction for share of trust net capital gain

    $25,000

    Net capital gain

    $22,500

     

    End of example

    Fixed trust distributions and the 50% active as set 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 in section 104-70 of the Income Tax Assessment Act 1997 (ITAA 1997).

    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.

    Last modified: 27 Jul 2020QC 27963