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Capital gains tax concessions for small business

Basic conditions

Section: 12.3

12.3 Basic conditions

There are four small business CGT concessions that may apply to eliminate or reduce the CGT payable on a CGT event (Division 152).

  • 15-year exemption
  • 50% active asset reduction
  • Retirement exemption
  • Rollover

To qualify for the four small business capital gains tax (CGT) concessions, you must satisfy the basic conditions that are common to all the concessions:

Basic conditions for entitlement

There are two basic conditions that must be met for entitlement to any of the small business CGT concessions:

i. Maximum net asset value test -  there is a limit of $6 million on the net value of the taxpayer's assets, or the taxpayer must be a small business entity with turnover of less than $2 million in the income year, and

ii. Active asset test - The CGT asset disposed of must be an active asset. if the active assets are shares or interest in a trust, there are additional conditions).

2. You must satisfy the 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 do not 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).

3.  Additional conditions where the asset is a share in a company or interest in a trust

This is only applicable if the CGT asset is a share in a company or interest in a trust.

To satisfy the basic conditions, one of the following must 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: Wednesday, July 21, 2021