To qualify for any of the small business CGT concessions, you must first satisfy at least one of the following basic conditions:
- you are a small business entity
- you satisfy the maximum net asset value test, or
- you are a partner in a partnership that is a small business entity, and the CGT asset is an asset of the partnership.
In addition, the asset must satisfy the active asset test.
If the CGT asset is a share in a company or an interest in a trust, one of these additional basic conditions must be satisfied just before the CGT event:
- you must be a CGT concession stakeholder in the company or trust, or
- the entity that owns the share or interest satisfies the 90% test.
In working out whether you are a small business entity, you need to consider whether you have any relevant entities.
What are relevant entities?
Relevant entities are:
- your affiliates, and
- any entities connected with you.
An individual or company is your affiliate if, in relation to their business affairs, they act or could reasonably be expected to act:
- in accordance with your directions or wishes, or
- in concert 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.
Am I a small business entity?
You will be a small business entity if you are an individual, partnership, company or trust that:
- is carrying on a business, and
- has an aggregated turnover of less than $2 million.
Aggregated turnover is your annual turnover plus the annual turnovers of any businesses that are connected with you or that are your affiliates (these are known as relevant entities).
There are three alternative methods to work out whether you are a small business entity for the current year. However, most businesses will only need to consider the first method.
1. Previous year turnover
If your aggregated turnover for the previous income year was less than $2 million you are a small business entity.
2. Estimate your current year turnover
If you estimate that your aggregated turnover for the current year (worked out as at the first day of the income year) is likely to be less than $2 million, you will be a small business entity for the current year. However, you cannot estimate your current year turnover if your aggregated turnover for the two previous income years was $2 million or more.
3. Actual current year turnover
If you are unable to use the first two methods, you will need to calculate your aggregated turnover as at the end of the income year. If your actual aggregated turnover is less than $2 million, you will be a small business entity for that year.
Example: Lana – aggregated turnover
When Lana is calculating her aggregated turnover, she will include Max's turnover because Max is Lana's affiliate. She will also include the turnover of Maxaco, because she is connected to the company through her affiliate (Max).
Lana will not include any income from her transactions with Max or Maxaco.
When Max is calculating his aggregated turnover, he will include Lana's turnover because Lana is Max's affiliate. He will also include the turnover of Maxaco because he is connected with the company.
Max will not include any income from his transactions with Lana or Maxaco.
End of exampleThe maximum net asset value test
To pass this test, the total net value of CGT assets must not exceed $6 million. You must add together the value of net assets for the following entities:
- you
- entities connected with you, or
- your affiliates, or entities connected with your affiliates.
The test must be met just before the CGT event that results in the capital gain.
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. This value can be positive, negative or nil. The $6 million limit isn't indexed for inflation.
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.
If you are a partner in a partnership and the CGT event happens in relation to a CGT asset of the partnership (for example, disposal of a partnership asset), the maximum net asset value test only counts the assets of each relevant partner and not the assets of the partnership as a whole.
However, if you are connected with the partnership, you count all the partnership assets and you don't count the value of your interest in the partnership.
What assets are not included?
Do not include the following assets when calculating the net value of your CGT assets:
- shares, units or other interests (apart from debt) held in any entities connected with you or connected with your affiliates (because the net value of the CGT assets of connected entities has already been included)
- any assets of an affiliate or an entity connected with an affiliate unless they are used, or held ready for use, in a business carried on by you or by an entity connected directly with you (but do not include assets of an entity connected with you only through your affiliate)
- if you are an individual, assets that are solely for your personal use (or the personal use of your affiliates) or superannuation assets, and
- if you are an individual, your own home provided the home has never had any income producing use. If part of the home has been used to produce assessable income, you must make a reasonable apportionment having regard to the length of time and the percentage of income producing use. The percentage of private use is multiplied by the current market value and this amount is not included.
Example: calculating the net value of assets
The market value of Lana's CGT assets is:
Land used in business |
$50,000 |
Business goodwill |
$200,000 |
Trading stock |
$100,000 |
Plant |
$50,000 |
Boat (used solely for personal use) |
$50,000 |
Home (used 50% for income producing activity with a market value of $600,000) |
$600,000 |
Total |
$1,050,000 |
Lana borrowed $20,000 to buy the boat.
Lana doesn't include the market value of her boat, or the liability relating to the boat, when calculating the net value of her CGT assets.
Lana includes 50% of the value of her home representing the income producing percentage
Therefore, the net value of her CGT assets is:
$1,050,000 − $350,000 = $700,000.
Depreciating assets
Even though gains from depreciating assets may be treated as income (rather than a capital gain), depreciating assets are CGT assets and taken into account for the maximum net asset value test.
End of example
Example: the maximum net asset value test
For the maximum net asset value test, Lana includes the market value of the land and building owned by her affiliate Max ($500,000), less any related liability ($400,000 mortgage). She does this because the land and building are used in her manufacturing business.
But she doesn't include Max's other assets used in his florist business because they aren't used in her manufacturing business. Nor does she include the assets of Maxaco because the assets are not used in her business and she is only connected to the company because of her affiliate (Max).
Accordingly, the net value of Max's CGT assets to be included is:
$500,000 − $400,000 = $100,000.
There are no other entities connected with Lana.
As the net value of Lana's CGT assets and those of her affiliates and connected entities doesn't exceed $6 million, she satisfies the maximum net asset value test.
End of exampleThe active asset test
This test requires the CGT asset to be an active asset for:
- 7½ years if owned for more than 15 years, or
- half of the test period if owned for 15 years or less.
In addition, the asset does not need to be an active asset just before the CGT event.
The test period begins when the asset is acquired and ends at the earlier of:
- the time of the CGT event, or
- when the business ceased (if that happened within 12 months of the event or if the Commissioner allows a longer time).
There are modified rules for CGT assets acquired or transferred under the rollover provisions relating to assets compulsorily acquired, lost or destroyed, or those relating to marriage breakdown.
A CGT asset is an active asset if it is owned by you and is:
- used or held ready for use in the course of carrying on a business by you, your affiliate, your spouse or child under 18 years, or an entity connected with you, or
- an intangible asset (for example, goodwill) inherently connected with a business carried on by you, your affiliate, your spouse or child under 18 years or a connected entity of yours.
In some circumstances, a share in a company or an interest in a trust can also be an active asset. However, certain CGT assets can't be active assets, even if they are used or held ready for use in the course of carrying on a business – for example, assets whose main use is to derive rent (unless the asset was rented to an affiliate or connected entity for use in their business).
Example: the active asset test
Lana has used the land in her business for at least half the period she owned it, that is, for two out of the three years she owned it.
Therefore, Lana satisfies the active asset test.
End of exampleAdditional conditions if the CGT asset is a share in a company or an interest in a trust
One of these additional basic conditions must be satisfied just before the CGT event:
- the entity claiming the concession must be a CGT concession stakeholder in the company or trust, or
- the entity claiming the concession must pass the 90% test.
CGT concession stakeholder
An individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust.
This participation percentage can be held directly or indirectly through one or more interposed entities. The percentages are worked out in the same way as for the significant individual test.
Significant individual test
An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. The 20% can be made up of direct and indirect percentages.
An entity's direct small business participation percentage in a company is the percentage of:
- voting power that the entity is entitled to exercise
- any dividend payment that the entity is entitled to receive, and
- any capital distribution that the entity is entitled to receive.
If an entity has different percentages in a company, their participation percentage is the smaller or smallest percentage. The same applies for a trust.
The significant individual test is different from the control tests used to determine if an entity is 'connected with' another entity for the purposes of the $6 million maximum net asset value test or aggregated turnover test.
Example: a significant individual
Lana has shares that entitle her to 30% of any dividends and capital distributions of Bean Co. The shares do not carry any voting rights.
Lana's direct small business participation percentage in Bean Co is zero percent because although she is entitled to 30% of dividends and capital distributions her percentage in the voting rights is zero and she must use the smallest percentage to calculate her small business participation percentage.
End of exampleAn entity's indirect small business participation percentage in a company or trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity, and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.
An indirect interest can be held through one or more interposed entities.
There are also rules about when an individual is a significant individual of a fixed trust (for example, unit trust) or a discretionary trust.
90% test
This test only applies if there is an interposed entity between the CGT concession stakeholders and the company or trust in which the shares or interests are held.
The interposed entity satisfies the test if 90% of the participation percentages in that entity are held by CGT concessions stakeholders of the company or trust in which the shares or interests are held.
As with the significant individual test, the participation percentage can be held directly or indirectly through multiple interposed entities.