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The CGT rules operate on the basis that a partner in a partnership carries on the partnership business collectively with the other partners. However, a partner cannot be a small business entity. It is the partnership that must satisfy the small business entity test - that is, the $2 million aggregated turnover test - to qualify as a small business entity.
If the relevant conditions are met, a partner may be eligible for the small business CGT concessions using the turnover test for:
- their interest in a partnership asset, or
- an asset that is not a partnership asset that is used in the business of the partnership.
In both cases the partner is not required to be connected with the partnership.
The maximum net asset value test applies differently so that it is the individual partners in the partnership that determine their eligibility for the small business CGT concessions, and not the partnership.
An asset is a partnership asset if the partners own the asset in accordance with their respective interests as specified in the partnership agreement.
Partners may be eligible for the concessions if:
- the asset is the partner's interest in a partnership asset, and
- that partnership is a small business entity.
Partners may also be eligible for the concessions for a CGT asset the partner owns (that is not their interest in a partnership asset) when the following conditions are satisfied in the income year:
- they were a partner in a partnership in the income year in which the CGT event happens to the partner's CGT asset
- that partnership uses the asset at a time in the income year, in carrying on the partnership business and is a small business entity for that income year
- the only business the partner carries on is as a partner in a partnership.
There is a special rule for calculating aggregated turnover in cases where a partner's asset is being used in the business carried on by the partnership.
An entity that is an affiliate of, or connected with, the partner is deemed to be an affiliate of, or connected with (as the case may be) the partnership that uses the asset. This rule only applies if the entity is not already an affiliate or connected with the partnership.
In calculating the aggregated turnover of the partnership, the turnover of entities that are deemed to be affiliates or connected entities must be included. The calculation of aggregated turnover is otherwise the same.
There is another special rule for calculating aggregated turnover where the taxpayer is a partner in more than one partnership and the asset is used in more than one partnership business. It treats each partnership that the taxpayer is a partner in, and that uses the asset, as being connected with the partnership that is trying to work out whether it is a small business entity (the test entity). When working out the aggregated turnover of the test partnership, the turnover of any other partnerships that are deemed to be connected must be included.
Beau and Irene each own 50% of a supermarket building, which is used in the business of a partnership carried on by Beau, Jack, Casey and Irene. The partnership trades under the name 'Auzzie Supermarket'.
Under the law prior to the June 2009 amendments, Beau and Irene would not be able to access the small business CGT concessions via the small business entity turnover test for any capital gain made on the sale of the building because their respective CGT asset is not an interest in an asset of the partnership. For the CGT assets to be interests in an asset of the partnership, Beau, Jack, Casey and Irene would either have to each own 25% of the supermarket building or the partnership agreement would have to specify what interest each partner owned in the building.
As a result of the June 2009 amendments, Beau and Irene may be able to access the small business CGT concessions in relation to their respective shares of the building via the small business entity turnover test, depending on the aggregated turnover of the partnership calculated respectively for Beau and Irene. The aggregated turnover of Auzzie Supermarket must be calculated separately for Beau and Irene, taking into account any entities that are affiliates of, or connected with, each of them respectively.
Last modified: 28 Jun 2012QC 25888