Capital gains tax concessions for small business
There are four small business CGT concessions that may apply to eliminate or reduce the CGT payable on a CGT event where the conditions in Division 152 are met. However, for any business to qualify for any of these concessions the business must met some basic conditions, such as:
- The turnover or maximum net asset value test
- Active asset test
- Additional conditions where the asset is share in a company or interest in a trust
The first two conditions always apply, whereas the third condition only applies if the asset being sold is a share in a company or an interest in a trust.
Turnover or maximum net asset value test
To satisfy the first basic condition, one of the following must be satisfied:
- entity must be a small business entity or a partner in a partnership which is a small business entity
- net value of the assets that the entity and related entities own do not exceed $6 million
Related generally refers to:
- entities connected with the entity: either entity controls the other entity or both entities are controlled by another entity
- affiliates of the entity: an individual or company that could reasonably be expected to act in accordance with the entities' wishes.
A spouse or child is not automatically considered to be an affiliate. It must be determined whether they are acting in accordance with the entities wishes in relation to their business affairs.
Small business entity test:
An individual, partnership, company or trust is a small business entity if it:
- carries on a business, or
- the turnover of the entity and related entities is less than $2 million
Maximum net asset value test:
Where an entity fails the small business test, it may still qualify for the concessions if the net value of the CGT assets the entity and related entities own do not exceed $6 million (not indexed). The net value of CGT assets of an entity is the market value of those assets less liabilities related to those assets. However, some assets are excluded such as:
- interest (e.g. share, units) in related entities (to prevent double counting of assets as the assets of related are already included) but the liabilities related to interests in related entities are included.
If the entity selling the asset is an individual, exclude:
- personal use assets (including the individual's main residence where it is not used to produce income)
- superannuation benefits
- insurance policies where the individual is the life insured.
Passively held assets used in a elated entities business:
The small business concessions may apply to an:
- asset of the partnership, or
- asset which a partner individually owns which is used in the partnership
If the small business entity test is used to access the concessions, the partnership must satisfy the small business entity test. Whereas, the maximum net asset value test applies to the individual partners in the partnership.
Active Asset test
The concessions apply to the sale of active assets (but not depreciating assets).
An active asset is an:
- asset which is used or held ready for use in a business carried on by the entity and related entities
- intangible asset e.g. goodwill that is inherently connected with the business carried on by the entity or related entities.
For an asset to be held ready for use it needs to be functionally operative. A premise under construction or a block of land upon which it is intended to construct a business premises would not be considered ready for use and therefore would not be active assets.
The active asset test is satisfied if the asset being sold is actively used in the entity's or related business and:
- the asset is owned for 15 years or less and it was an active asset for half of the test period
- the asset is owned for more than 15 years and it was an active asset for at least 7 half years of the test period.
The test period begins when the asset is acquired and ends when it is either sold or the business ceases if this occurs before the asset is sold. The shorter test period will generally apply where the asset is sold within 12 months of the business ceasing. The asset does not need to be an active asset at the time of disposal.
Shares and interests in a trust may be active assets
Where the asset being sold is a share in a company or interest in a trust, the asset must satisfy the active asset test.
A share in a company or interest in a trust in a trust is an active asset if 80% or more of the market value of all assets of the company or trust are active assets.
This includes cash and financial instruments inherently connected with the business carried on by the company or trust (these are not active assets but are included in the 80%).
Depreciating assets e.g.. plant and equipment which are active assets may be included in the 80% test.
Certain assets cannot be active assets:
Certain assets cannot be active assets even though they may be used or held ready for use in carrying on a business. These include:
- assets mainly used to derive rent (or passive income)
- shares in a companies or interests in trusts that don't satisfy the 80% test
- financial instruments e.g. bank accounts, loans, debentures, bonds, futures, shares options (unless they are inherently connected with the business and are therefore included in the 80% test).
Additional conditions where asset is a share in a company or interest in a trust
This basic condition only applies where the asset being sold is a share in a company or interest in a trust.
To satisfy the basic conditions, one of the following must be apply just before the share or interest is sold:
- the entity claiming the concession must be a CGT concession stakeholder in the company or trust
- if there is an interposed entity between the CGT concession stakeholder and the company or trust in which the shares or interests are held. the CGT concession stakeholder must have at least 90% of the voting power, receipt of dividends/income distributions or capital distributions of the interposed entity.
This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.
Last modified: Monday, September 28, 2020