Meeting the basic conditions for the concessions

Step 1 Work out whether you meet the basic conditions

You may qualify for one or more of the small business CGT concessions if you:

• are a small business entity
• do not carry on business (other than as a partner) but your asset is used in business by a small business entity that is your affiliate or is connected with you (passively-held assets)
• are a partner in a partnership that is a small business entity and the CGT asset is
  • your interest in a partnership asset (partnership assets)
  • an asset you own that is not an interest in a partnership asset (partner's assets), or
   
• meet the maximum net asset value test.

From 2007–08, you have better access to the small business CGT concessions if you are:

• a taxpayer who owns a CGT asset used in the business of an affiliate or connected entity (passively-held assets)
• a partner who owns a CGT asset used in the partnership business (partner's assets).

Also, the asset must meet 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
• the entity that owns the share or interest must satisfy the 90% test.

In working out whether you are a small business entity, you need to consider whether you have any affiliates or connected entities (relevant entities).

Working out whether you have relevant entities

Relevant entities are:

• your affiliates
• any entity 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 either of the following ways:

• according to your directions or wishes
• in concert with you.

An entity is ‘connected with’ another entity if either of the following applies:

• either entity controls the other
• both entities are controlled by the same third entity.

In certain situations:

• your spouse or child under 18 years may be taken to be your affiliate
• an entity can be taken to be your affiliate or connected with you in some circumstances (see Passively-held assets and Partner's assets).

Spouse and child affiliates

Where you own an asset that your spouse or child under 18 years uses in their business, they will be taken to be your affiliate.

This applies for the purposes of the:

• active asset test
• $6 million maximum net asset value test
• $2 million aggregated turnover test.

Your spouse or child under 18 years may also be taken to be your affiliate where an asset is owned by one entity but used in a business carried on by another entity.

An entity may also be taken to be connected with you or with your entity because of your spouse or child under 18 years.

Working out whether you are a small business entity

You are a small business entity if you are an individual, partnership, company or trust that:

• is carrying on a business
• 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 (‘relevant entities’). See Working out whether you have relevant entities.

There are three alternative methods to work out whether you are a small business for the current year. However, most businesses will only need to consider the ‘Previous year turnover’ method.

Previous year turnover

If your aggregated turnover for the previous income year was less than $2 million, you are a small business entity.

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 are a small business entity for the current year. However, you cannot use this method if your aggregated turnover for the two previous income years was $2 million or more.

Actual current year turnover

If you cannot 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 are a small business for that year.

Find out more:

• Advanced guide to capital gains tax concessions for small business 2013–14.

 

Passively-held assets

This basic condition allows you to access the concessions for a CGT asset you own where you are not carrying on a business but the CGT asset is used in one of the following:

• your affiliate’s business
• the business of an entity connected with you.

It can also apply where your asset is held ready for use in, or is inherently connected with, one of these.

In the year the CGT event happens to your asset, your affiliate or the business of an entity connected with you must be:

• using your asset in their business
• a small business entity.

If you carry on a business in partnership, the CGT asset cannot be your interest in a partnership asset.

There is a special rule for working out aggregated turnover where your asset is used by:

• your affiliate’s business
• the business of an entity connected with you.

This rule deems an entity that is your affiliate or is connected with you is an affiliate or is connected with the business entity that uses your asset. This rule only applies if the entity is not already an affiliate or connected with the partnership.

In working out the aggregated turnover of the entity that uses your asset, you must include the turnovers of entities that are deemed to be your affiliates or connected with you. Otherwise, working out the aggregated turnover is the same.

There is a special affiliate rule for spouses and children under 18 years of age that applies in these cases (see Spouse and child affiliates).

Partner in a partnership: small business entity test

The CGT rules operate on the basis that a partner in a partnership carries on the partnership business collectively with the other partners. A partner cannot be a small business entity – it is the partnership that must meet the turnover test to qualify as a small business entity.

If the relevant conditions are met, a partner may be eligible for the small business CGT concessions using the turnover test for either of the following:

• their interest in a partnership asset
• an asset that is not a partnership asset that is used in the business of the partnership.

In either case, the partner does not have to be connected with the partnership.

The maximum net asset value test applies differently. For this test you use the individual partners in the partnership, not the partnership itself, to work out whether they are eligible for the small business CGT concessions.

Partnership assets

An asset is a partnership asset if the partners own the asset according to their respective interests in the partnership as specified in the partnership agreement.

Partners may be eligible for the concessions if, in the year the CGT event happens to their asset, both of the following apply:

• the asset is the partner’s interest in a partnership asset
• the partnership is a small business entity.

Partner's assets

A partner may also be eligible for the concessions for a CGT asset they own (that is not an interest in a partnership asset). They may be eligible if the following conditions are met in the income year in which the CGT event happens to their CGT asset:

• they are a partner in a partnership
• the partnership uses the asset in carrying on the partnership business
• the partnership is a small business entity
• the only business the partner carries on is as a partner in a partnership.

There is a special rule for working out aggregated turnover where your asset is used in the business carried on by the partnership. This rule says an entity that is your affiliate or is connected with you is an affiliate of, or is connected with, the partnership that uses your asset. This rule only applies if the entity is not already an affiliate of, or connected with, the partnership.

In working out the aggregated turnover of the partnership, the turnover of entities that are deemed to be affiliates or connected entities must be included. Otherwise, working out the aggregated turnover is the same.

There is 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.

Each of these partnerships are treated as being connected with the partnership that is trying to work out if it is a small business entity (the test entity). When working out the aggregated turnover of the test partnership, you must include the turnover of any of these other partnerships.

If your business is winding up

The basic conditions for passively-held assets and partner’s assets require that:

the asset is used in the business of your affiliate, connected entity or partnership, at a time in the income year that the CGT event happens, and

the entity is a small business entity in the year that the event happens.

If the business has stopped operating, there are special rules that apply to allow you to meet these requirements.

Find out more:

• Advanced guide to capital gains tax concessions for small business 2013–14. 

The maximum net asset value test

To pass this test, the total net value of your CGT assets must not exceed $6 million. To work out the total net value of your CGT assets, you must add together the value of net assets for the following entities:

• you
• entities connected with you
• your affiliates
• entities connected with your affiliates.

Include the net value of assets of your affiliates, and entities connected with your affiliates, only if the assets are used, or held ready for use, in a business carried on by you or an entity connected with you. Don’t include an asset of your affiliate, or an entity connected with your affiliate, if it is used in the business of an entity that is connected with you only because of your affiliate.

You must meet the test 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 is not indexed for inflation.

Under the maximum net asset value test, you can reduce the net value of your CGT assets 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 yours or a CGT asset of the partnership (for example, the disposal of a partnership asset) and you are not connected with the partnership, you:

• count only your interest in the partnership
• do not count the assets of the partnership as a whole.

However, if you are connected with the partnership, you:

• count all the partnership assets
• do not count the value of your interest in the partnership.

Assets that are not included

Do not include the following assets when working out the net value of your CGT assets:

• shares, units or other interests (apart from debt) held in any entities connected with you or your affiliates (because you have already included the net value of connected entities’ CGT assets)
• any assets of an affiliate or an entity connected with an affiliate unless they are used, or held ready for use, in a business you carry on or an entity connected with you carries on
• if you are an individual
  • assets that are solely for your personal use (or for your affiliates’ personal use) or superannuation assets
  • your own home, provided the home has never had any income producing use. If you have used part of the home to produce assessable income, you must make a reasonable apportionment having regard to the length of time and the percentage of income producing use. You multiply the percentage of private use by the current market value and do not include this amount.
   

Even though gains from depreciating assets may be treated as income rather than a capital gain, depreciating assets are CGT assets and you must consider them for the maximum net asset value test.

 

Find out more:

• Advanced guide to capital gains tax concessions for small business 2013–14. 

The active asset test

For this test, the CGT asset must be an active asset for at least:

• 7.5 years if you have owned it for more than 15 years, or
• half of the test period if you have owned it for 15 years or less.

The asset does not need to be an active asset just before the CGT event.

The test period begins when you acquire the asset and ends at the earlier of:

• the time of the CGT event
• when the business stopped (if that happened within 12 months of the event or within a longer timeframe allowed by the Commissioner).

There are modified rules for CGT assets you acquired or transferred under the rollover provisions for assets:

• compulsorily acquired
• lost or destroyed
• relating to a marriage breakdown.

A CGT asset is an active asset if you own it and:

• you use it or hold ready for use in the course of carrying on a business (whether alone or in partnership)
• it is an intangible asset (for example, goodwill) inherently connected with a business you carry on (whether alone or in partnership).

It is still an active asset if you own it and it is used or held ready for use in the course of carrying on a business (whether alone or in partnership) by any of the following:

• your affiliate
• your spouse or child under 18 years
• an entity connected with you.

However, certain CGT assets cannot 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). Generally a rental property will not be an active asset.

The June 2009 amendments ensure you consider all uses of an asset to work out the asset’s main use to determine whether it is an active asset. However, you do not consider your personal use of an asset you own, or its use by an individual who is your affiliate, to work out the main use of the asset.

The amendments apply to CGT events that happen on or after 23 June 2009.

Find out more:

• Advanced guide to capital gains tax concessions for small business 2013–14. 

Spouses and children under 18 years

For an asset to be an active asset, it must be used or held ready for use in, or inherently connected with:

• your business
• a business your affiliate or an entity connected with you, carries on.

Where you own an asset that your spouse or child under 18 years uses in their business, they are your affiliate for the purposes of the:

• active asset test
• $6 million maximum net asset value test
• $2 million aggregated turnover test.

Your spouse or child may also be your affiliate where one of the following applies:

• you own an asset that is used in a business carried on by an entity that your spouse or child owns or has an interest in
• an entity you own or have an interest in, owns an asset that is used in a business which your spouse or child carries on, or an entity that your spouse or child owns or has an interest in.

Treat your spouse or child as your affiliate when working out whether the entity that owns the asset is:

• an affiliate
• connected with the entity that uses the asset in their business.

This may allow your asset to be an active asset.

Find out more:

If this would result in you being ineligible for the concessions, see the Advanced guide to capital gains tax concessions for small business 2013–14.

Shares and interests in trusts

In some circumstances, a share in a company or an interest in a trust can also be an active asset.

Additional conditions: shares and interests

If the CGT asset is a share in a company or an interest in a trust, you must meet one of these additional basic conditions just before the CGT event:

• you must be a CGT concession stakeholder in the company or trust, or
• you 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 greater than zero (see the Significant individual test).

This participation percentage can be held directly or indirectly through one or more interposed entities. You work out the percentages 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 (except for jointly owned shares)
• any dividend payment it is entitled to receive
• any capital distribution it is entitled to receive.

As a result of the March 2012 amendments, the voting power calculation is ignored where the shares are jointly owned, as neither owner would individually control the voting power on the jointly owned shares. This amendment applies from 2006–07.

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 March 2012 amendments also allow an object of a discretionary trust to calculate their direct small business participation percentage to be more than zero, where the trust:

• did not make any distributions of income or capital, and
• had a tax loss or no net income for the income year.

Find out more:

• Discretionary trusts with tax losses or no net income in the Advanced guide to capital gains tax concessions for small business 2013–14.

The significant individual test is different from the control tests used to work out if an entity is connected with another entity for the purposes of the $6 million maximum net asset value test or the $2 million aggregated turnover test.

To work out an entity’s indirect small business participation percentage in a company or trust, you multiply the entity’s direct participation percentage in an interposed entity with the interposed entity’s total participation percentage (both direct and indirect) in the company or trust.

You can hold an indirect interest 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 small business participation percentages in that entity totalling at least 90% 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.

Find out more:

• Advanced guide to capital gains tax concessions for small business 2013–14. 

Death and the small business CGT concessions

If you are one of the following you may be eligible for the concessions to the same extent that the deceased would have been just before their death:

• a beneficiary of a deceased estate
• a legal personal representative of the deceased (executor)
• a surviving joint tenant
• a trustee or beneficiary of a testamentary trust (a trust that is created by the will of the deceased).

You will be eligible for the concessions where the CGT event happens within two years of the individual’s death. Some of the conditions within each concession are modified in these cases. We may extend this two-year period.

Find out more:

• Advanced guide to capital gains tax concessions for small business 2013–14.