The maximum net asset value test
To pass this test, the total net value of capital gains tax (CGT) assets must not exceed $6 million. This test must be met just before the CGT event that results in the capital gain. You must consider the value of net assets for the following entities:
- entities connected with you
- your affiliates, or entities connected with your affiliates.
The net value of the CGT assets of an entity is the total market value of its assets, less any liabilities relating to those assets. The maximum net asset value test allows the net asset value of an entity to be reduced by provisions for annual leave, long service leave, unearned income and tax liabilities. This value can be positive, negative or nil.
Note: If your business is carried on as a partnership, it is the individual partner and not the partnership that must satisfy the maximum net asset value test.
If you are a partner in a partnership and the CGT event happens to a CGT asset of the partnership (for example, disposal of a partnership asset), it is only the partner’s interest in the partnership assets that counts towards the value of the partner’s assets. However, if the partner is connected with the partnership, it will be the assets of the partnership as a whole that will be counted for the maximum net asset value test.
What assets are not included?
Do not include assets of your affiliate, or an entity connected with your affiliate, unless those assets are used, or held ready for use, in your business or the business of an entity connected with you.
Include only those assets that are used, or held ready for use, in a business of yours, or an entity connected with you.
Depreciating assets are CGT assets and are taken into account for the maximum net asset value test.
Who is an affiliate?
An affiliate is any individual or company that, in relation to their own business affairs, acts or could reasonably be expected to act:
- in accordance with your directions or wishes, or
- in concert with you.
In certain circumstances an individual or entity may be taken to be your affiliate – see Spouses and children as affiliates, Passively-held assets and Partners in partnership.
When is an entity connected with you?
An entity is ‘connected with’ another entity if:
- either entity controls the other, or
- both entities are controlled by the same third entity.
In certain circumstances an entity may be taken to be connected with you – see Passively-held assets and Partners in partnership.
When do you control another entity?
You control another entity (company, partnership or non-discretionary trust) if you, your affiliates, or all of you together:
- are entitled to 40% or more of distributions of income or capital, or
- own shares that give you 40% or more of the voting power in the company.
You control a discretionary trust if you, your affiliates, or all of you together were entitled to 40% or more of the distributions of income or capital in any of the preceding four years. You also control a discretionary trust if the trustee acts, or could reasonably be expected to act, in accordance with the directions or wishes of you, your affiliates, or all of you together.