CGT small business entity eligibility

Small business entity eligibility for the CGT concessions

You're a CGT small business entity for the 4 CGT concessions if you're an individual, partnership, company or trust that:

• is running a business
• has an aggregated turnover of less than $2 million.

Aggregated turnover is your annual turnover plus the annual turnovers of any business entities that are your affiliates or connected with you.

If your business is a partnership, it's the partnership and not the individual partner that must be the CGT small business entity.

To work out whether you're a CGT small business entity for the current year, you need to calculate your aggregated turnover.

You're a CGT small business entity for the current year if your:

• aggregated turnover for the previous income year was less than $2 million
• actual aggregated turnover is less than $2 million at the end of the income year.

You need to work out if you are eligible each year.

Calculate your aggregated turnover

To calculate your aggregated turnover, you need to:

1. work out your annual turnover (for your previous or current year)
2. include the annual turnover of any affiliates or connected entities
3. work out your aggregated turnover.

If you do not have any affiliates or entities connected with you, your aggregated turnover is the same as your annual turnover. In this case, you only need to do step 1.

Step 1: Work out your annual turnover (for your previous or current year)

Your annual turnover includes all ordinary income you earned in the normal course of running a business for the income year. Annual turnover is your gross income or proceeds, not your net profit.

You can:

• use your previous year's annual turnover
• use your actual annual turnover at the end of the current year
• estimate your current year annual turnover.

You can only estimate your current year annual turnover if your annual turnover for 1 of the 2 previous income years was less than $2 million.

You need to determine whether your annual turnover is likely to be less than $2 million.

You must estimate your annual turnover based on the conditions that you're aware of at the beginning of the income year.

Factors to consider when estimating your annual turnover include:

• your annual turnover in previous income years
• whether you plan to reduce or increase staff in the current year
• whether your business operating hours are increasing or decreasing
• whether previous extraordinary sales or product lines will be available in the current income year
• whether your business will face increased competition in the current income year
• whether your business activity will increase or decrease because of changing conditions.

If you operate multiple business activities, either as a sole trader or within the same business structure, you must include the income from all your activities when working out your annual turnover. For example, a sole trader operating a part-time consultancy and a retail shop would include the income from both business activities when working out annual turnover.

Include these amounts in your annual turnover:

• sales of trading stock
• fees for services provided
• interest from business bank accounts
• foreign business income
• amounts received to replace something that would have had the character of business income - for example, a payment received for the loss of business earnings.

Do not include these amounts:

• GST you charged on a transaction
• amounts borrowed for the business
• proceeds from the sale of business capital assets
• insurance proceeds for the loss or destruction of a business asset
• amounts received from repayments of farm management deposits
• retail fuel sales. This is a special rule because sales of retail fuel are usually high in sales volume with low profit margins.

Assessable income from an individual's personal income protection insurance policy is not included as it is not from a business activity.

Operating a business for part of the year

If you start or cease a business part way through an income year, you must make a reasonable estimate of what your annual turnover would have been if you ran the business for the entire income year.

Non-arm’s length business transactions

If you have business transactions with associates that are not at arm’s length (that is, you discounted the goods or services you sold to them because of their association with you), you must use the market value of the goods or services when calculating your annual turnover.

However, you may consider any discounts that you would have offered typically, had the dealing been at arm’s length.

As an individual, your associates include, but are not limited, to:

• your relatives, such as your spouse or children
• a partnership that you are a partner in
• another partner in that partnership, and that partner’s spouse and children
• a trustee of a trust that you, or your associate, are a beneficiary of
• a company that you, or your associate, control or influence.

There are similar rules to determine who is an associate of a company, partnership and trustee. For a full list of what is considered an associate, see Income Tax Assessment Act 1936 Section 318.

Step 2: Include the annual turnover of any affiliates or connected entities

Include the annual turnover of any relevant business entity that, at any time during the income year, was:

• your affiliate
• connected with you.

Repeat step 1 for each relevant business entity to work out their annual turnover.

You must use the same method for working out your annual turnover and the annual turnovers of all your relevant businesses entities.

Special rules for partnerships

There's a special rule for calculating the aggregated turnover of a partnership in cases where a partner's asset is being used in the business run by the partnership.

An entity that is your affiliate, or connected with you, is deemed to be an affiliate of, or connected with the partnership that uses the asset.

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's another special rule for working out aggregated turnover where:

• you are a partner in more than one partnership, and
• the asset is used in more than one partnership’s business.

In this case, each partnership that you're a partner in, and that uses the asset, is treated as being connected with the partnership for the purpose of working out whether it's 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.

Step 3: Work out your aggregated turnover

Add the annual turnovers of relevant business entities to your annual turnover. This is your aggregated turnover.

Do not include income:

• from dealings between you and a relevant business entity
• from dealings between any of your relevant business entities
• of an entity when it was not your relevant business.

'Dealings' are transactions or relations with others, usually in business.

If your aggregated turnover is less than $2 million, you're a small business entity for the current year.

If you're not a small business entity in an income year, you may still be able to access the CGT concessions if you meet the maximum net asset value test.

Work out your aggregated turnover to see if you're a small business entity for the small business CGT concessions.