The active asset test is satisfied if the asset was an active asset of yours:
- for a total of at least 7 ½ years during the test period, if you have owned it for more than 15 years, or
- for a total of at least half of the test period, if you have owned it for 15 years or less.
The test period:
- begins when you acquired the asset, and
- ends at the earlier of
- the CGT event, and
- when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).
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 of the three years she owned it.
Therefore, Lana meets the active asset test.
End of exampleThe periods in which the asset is an active asset do not need to be continuous. However, they must add up to the minimum periods specified above, depending on the total period of ownership.
The asset does not need to be an active asset just before the CGT event.
Example
Jodie ran a florist business from a shop she has owned for eight years. She ran the business for five years, and then leased it to an unrelated party for three years before selling. The shop satisfies the active asset test because it was actively used in Jodie’s business for more than half the period of ownership, even though the property was not used in the business just before it was disposed of.
End of exampleMeaning of active asset
A CGT asset is an active asset if you own it and :
- you use it or hold it 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).
A CGT asset is also an active asset if you own it and it is used or held ready for use in the course of carrying on a business, or it is an intangible asset inherently connected with a business carried on, (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.
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.
Land subdivision and active asset test
If land, part of which is used in the business of the taxpayer and part of which is vacant, is subdivided, the new subdivided blocks created out of the vacant part of the land will not satisfy the active asset test when they are sold.
Example
Tom acquired 10 hectares of land as a single parcel in 1988. There are three distinct areas of the land which have different uses. Approximately 20% of the land is used in his business and 20% of the land is used for domestic purposes and contains Tom's main residence. The remaining 60% (rear of property) is vacant. The vacant part of the property has not been used or held ready for use for any purpose. Tom will subdivide the land into residential blocks. The subdivided blocks will not be trading stock because Tom is not carrying on a business of land development. After the subdivision is completed, Tom will sell all of the new subdivided blocks including those created out of the vacant part of the land.
Land is a CGT asset. Tom owns the land and used it in his business. Although only 20% of the land area has been used in the business, it is considered the conditions of an active asset are satisfied.
When the land is subdivided, the original land parcel is split into subdivided blocks which are separate new assets. When a CGT asset is split into two or more assets and you are the beneficial owner of the original asset and each new asset, the split is not a CGT event. You work out the cost base and reduced cost base of each new asset using the method statement set out for split, changed or merged assets.
The new subdivided blocks are taken to have been acquired by Tom when that original parcel was acquired. The disposal of a subdivided block is treated as the disposal of an asset in its own right, and not as a disposal of part of an asset (the original land parcel).
The subdivided blocks that are created out of the vacant part of the land are new assets that have never been used or held ready for use in any business. Therefore, they are not active assets.
The main residence exemption will apply to the dwelling including up to two hectares of land adjacent to the dwelling, provided the main residence provisions are satisfied.
The new subdivided blocks created out of the part of the land on which Tom carried on the business will satisfy the active asset test when they are sold as they were owned for more than 15 years and were active assets for at least 7 1/2 years.
End of exampleCessation of a business
If the CGT event happens within 12 months after the business ceased, the test period can end when the business ceased.
This aspect of the active asset test allows some flexibility in the situation where a business is sold, or has otherwise ceased, and an asset previously used in the business is sold after that time. The asset only needs to be an active asset for half (to a maximum of 7.5 years) of the shorter test period during the total time the asset was owned.
If the CGT event happens more than 12 months after the business ceased, the test period ends either:
- when the CGT event happens, or
- when the business ceased, if the Commissioner grants you an extension of time.
Extension of time requests are considered on the merits of each case.
For the purposes of the active asset test, the cessation of a business includes the sale of a business, that is, it is not limited to a business that ends in the sense that no-one continues to carry it on, but also includes a business that has ceased to be carried on by an entity because the entity has sold that business.
Example
Laura purchased business premises in February 2011 and immediately started to carry on her business from the premises. Her business expanded and she moved to larger premises across the street in April 2014. She entered into a contract to sell the original premises in July 2014. The premises were an active asset for at least half the period beginning in February 2011 and ending just before the CGT event in July 2014 and accordingly the active asset test is satisfied.
End of exampleDeath and the active asset test
Where you are one of the following you may be eligible for the concessions to the same extent that the deceased would have been just prior to their death:
- a beneficiary of a deceased estate
- a legal personal representative (executor)
- a surviving joint tenant
- a trustee or beneficiary of a testamentary trust (trust created by a will).
You will be eligible for the concessions where the CGT event happens within two years of the individual’s death. Otherwise the active asset test applies to you in the normal way as explained earlier for any capital gain made on a sale of the assets after the two-year time limit. This means that if you do not continue to carry on the deceased's business, or use the asset in another business, after the two-year time period, the active asset test may not be satisfied and the small business concessions may not be available.
The Commissioner can extend this two-year period.
Continuing time periods for active asset test for involuntary disposals
There are modified rules to determine if the active asset test is satisfied for CGT assets acquired or transferred under the rollover provisions relating to assets compulsorily acquired, lost or destroyed, or to marriage breakdown (Subdivisions 124-B and 126-A of the ITAA 1997 respectively).
If you acquired a replacement asset to satisfy the rollover requirements for the compulsory acquisition, loss or destruction of a CGT asset, the replacement asset is treated as if:
- you acquired it when you acquired the original asset, and
- it was an active asset at all times when the original asset was an active asset.
If you have a CGT asset transferred to you because of a marriage breakdown, and the capital gain arising from that transfer was rolled over under the marriage breakdown rollover provisions, for purposes of the active asset test you can choose whether to:
- include the ownership and active asset periods of your former spouse, or
- commence the ownership and active asset periods from the time the asset was transferred to you.
If you choose to include your former spouse's ownership and active asset periods of the CGT asset, that asset is treated as if it had been:
- acquired by you when your former spouse acquired the asset, and
- was an active asset of yours at all times when the asset was an active asset of your former spouse.
Modified active asset test for CGT event D1
A modified active asset test applies if you make a capital gain from CGT event D1 (about creating rights in another entity).
The active asset test requires you to own the CGT asset before the CGT event happens. However, under CGT event D1, the relevant CGT asset (the rights) are created in the other entity without you owning them, so it would not be possible to satisfy the active asset test.
Accordingly, the test is modified to require the right you create that triggers the CGT event to be inherently connected with another CGT asset of yours that satisfies the active asset test.
Businesses that are winding up
If you are accessing the concessions using the basic condition for passively-held assets or a partner’s assets, there is a special rule that affects the period of time that your asset is an active asset in the CGT event year. It applies in the income year the CGT event happens where:
- a business previously carried on by your affiliate, an entity connected with you or a partnership in which you are a partner, is being wound up and the asset is no longer being used in the business, and
- the asset was used, held ready for use in, or inherently connected with the business at a time in a previous income year when you ceased to carry on the business.
This rule treats the entity as carrying on the business for a moment in time in the income year the CGT event happens and treats the asset as being used, held ready for use in, or inherently connected with, the business at that same moment in time in the CGT event year. The asset must still pass the active asset test.
This rule is also required to enable you to meet the basic condition for passively- held assets and partner’s assets.
When an asset is ‘held ready for use’
For an asset to be held ready for use in the course of carrying on a business, it needs to be in a state of preparedness for use in the business and functionally operative. As such, premises still under construction, or land upon which it is intended to construct business premises, could not be said to be 'held ready for use' and would, therefore, not be active assets at that time.
Example
Margaret carried on business at various customer on-site locations. She acquired some land with the intention of constructing premises in which to carry on her business. Soon after Margaret acquired the land she was approached by another party that was keen to acquire the land. Margaret sold the land and made a capital gain. She was only part way through the construction of the premises at that time.
In this situation, the land was not held ready for use by Margaret in the course of carrying on her business at any time. It was not in a state of preparedness from which Margaret could carry on her business. Accordingly, the land was not an active asset at any time.
End of exampleWhen shares and trust interests are active assets
A CGT asset is also an active asset at a given time if you own it and:
- it is either a share in a company that is an Australian resident at that time or an interest in a trust that is a resident trust for CGT purposes for the income year in which that time occurs, and
- the total of the following is 80% or more of the market value of all of the assets of the company or trust
- the market values of the active assets of the company or trust, and
- the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on, and
- any cash of the company or trust that is inherently connected with such a business.
This means a share in a company or an interest in a trust is an active asset if the company or trust itself has active assets (and inherently connected financial instruments and cash) with a market value of at least 80% of the market value of all its assets.
Cash and financial instruments are not active assets, but they count towards the satisfaction of the 80% test provided they are inherently connected with the business.
Inherent connection
Inherent connection necessarily requires something more than just some form of connection between the financial instrument and the business. A thing might be regarded as inherently connected to a business when it is a permanent or characteristic attribute of the business – for example, goodwill, or trade debtors. Where a business is holding excess funds arising from a temporary spike in trading activity or the sale of a business asset, the excess funds might also reasonably be regarded as inherently connected with the business. A financial instrument must be inherently connected with a business that the owner of the financial instrument carries on, rather than any business a related entity carries on.
Example
Archimedes Pty Ltd carries on a manufacturing business. It lends $300,000 to a related company, Galileo Pty Ltd, to acquire various assets to be used in the businesses of both companies. However, a loan (being a financial instrument) a company makes to a related entity to fund the acquisition of assets is not considered to be a permanent or characteristic attribute of the business the company carries on. As such, loans made between members of a corporate group as part of the overall financing of the group are not considered to be inherently connected with the business the lender carries on. Accordingly, the loan by Archimedes Pty Ltd to Galileo Pty Ltd is not included in the numerator (but is still included in the denominator) of the 80% test calculation in determining whether the shares in Archimedes Pty Ltd are active assets. If the market value of Archimedes Pty Ltd's active assets is $700,000 such that the market value of all its assets (including the loan) is $1,000,000, the relevant calculation is:
$700,000/$1,000,000 = 70%
therefore the 80% test is not satisfied and the shares in Archimedes Pty Ltd are not active assets.
End of exampleThe active asset test requires a CGT asset to have been an active asset for at least half of a particular period, as outlined earlier, for example, for a share in an Australian resident company to meet this requirement, the company must satisfy the 80% test for that same period.
The 80% test will be taken to have been met:
- where breaches of the threshold are only temporary in nature, and
- in circumstances where it is reasonable to conclude that the 80% threshold has been passed.
Example
John sells an active asset that meets the basic conditions and makes a capital gain of $500,000. He acquired shares in Fruit and Veg Co, which runs his family business, as replacement assets. The shares in Fruit and Veg Co meet the 80% test and, as a result, they are active assets.
Some time later, Fruit and Veg Co borrows money to pay a dividend, and fails the 80% test. Two weeks later the dividend is paid and the shares pass the 80% test again. For the two weeks, the shares are treated as active assets even though they do not pass the 80% test.
End of exampleExample
Jack and Jill are the only shareholders of Hill Water Supplies Pty Ltd, an Australian resident company that carries on a water supply business. The market values of the company’s CGT assets are as follows:
|
Business premises |
$ 400,000 |
The total market value of the company’s active assets is $900,000, which is more than 80% of the total market value of all the company’s assets. Therefore, Jack and Jill’s shares in the company are active assets.
The company sells its water filtration plant (for its market value of $200,000) and then immediately contracts to purchase new plant, which is delivered and installed two months later. The funds from the sale are held in the company’s bank account before being used to pay for the new plant.
In this situation, although the market value of the company’s active assets has dropped below the 80% mark, the company's bank account holding the $200,000 is a financial instrument inherently connected with the company's business and is therefore included in the calculation. This means the 80% test remains satisfied.
Although gains from depreciating assets may be treated as income rather than capital gains, depreciating assets, such as plant, are still CGT assets and may, therefore, be active assets and included in the 80% test.
End of exampleInterests in holding entities
An interest in an entity that itself holds interests in another entity that operates a business may be an active asset, depending on the successive application of the 80% test at each level.
Example
Ben owns 100% of the shares in Holding Co, which, in turn, owns 100% of the shares in Operating Co (both are resident companies). The only assets of Holding Co are the shares in Operating Co, and all of Operating Co’s assets are active assets.
As Operating Co satisfies the 80% test, the shares owned by Holding Co in Operating Co are active assets. As those shares are the only assets owned by Holding Co, then Holding Co also satisfies the 80% test. As a result, the shares owned by Ben in Holding Co are also active assets.
If Ben sold the shares in Holding Co, all the small business concessions may potentially apply to any gains made.
If Holding Co sold its shares in Operating Co, the small business concessions may apply because Ben is a CGT concessional stakeholder in Operating Co as well as having a small business participation percentage in Holding Co of at least 90%.
If Operating Co sold its active assets, Operating Co may be entitled to the small business concessions because Ben is a significant individual and CGT concessional stakeholder in Operating Co as a result of his direct and indirect small business participation percentage. For more information, see the significant individual test.
End of exampleAssets that cannot be active assets
The following CGT assets cannot be active assets (even if they are used, or held ready for use, in the course of carrying on a business):
- shares in companies or interests in trusts, other than those that satisfy the 80% test; see When shares and trust interests are active assets
- financial instruments, such as bank accounts, loans, debentures, bonds, futures and other contracts and share options (Note: if a financial instrument is inherently connected with the business, it can nevertheless count towards the satisfaction of the 80% test)
- assets whose main use is to derive interest, an annuity, rent, royalties or foreign exchange gains (unless the main use for deriving rent was only temporary or the asset is an intangible asset that you have substantially developed or improved so that its market value has been substantially enhanced)
- shares and trust interests in widely-held entities, unless held by a CGT concession stakeholder in the widely-held entity.
Trade debtors are not considered to be financial instruments for the purposes of the active asset exclusions. Rather, they are a business facilitation mechanism that assists in the conduct of the business and are inherently connected with the business. Accordingly, trade debtors can be included in the value of active assets when calculating the 80% test.
Where asset's main use is to derive rent
As already noted, an asset whose main use is to derive rent (unless that main use is only temporary) cannot be an active asset. This is the case even if the asset is used in the course of carrying on a business.
Whether an asset's main use is to derive rent will depend on the particular circumstances of each case. The term 'rent' has been described as referring to the payments made by a tenant or lessee to a landlord or lessor for exclusive possession of the leased premises. As such, a key factor in determining whether an occupant of premises is a lessee paying rent is whether the occupier has a right to exclusive possession.
If, for example, premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises are not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are not likely to be rent.
An asset that is leased to a connected entity or affiliate for use in its business may still be an active asset. It is the use of the asset in that entity’s business that will determine the active asset status of the asset.
All uses of an asset are considered in determining what the main use of the asset is and, therefore, whether it is an active asset. However, personal use of the asset by the asset owner, or by an individual who is their affiliate, is not considered in determining the main use of the asset.
Example
Rachael owns five investment properties which she rents to tenants under lease agreements that grant exclusive possession. The lease terms vary from six months to two years. The properties are not active assets because they are mainly (only) used by Rachael to derive rent. It is irrelevant whether Rachael’s activities constitute a business.
End of exampleExample
Michael owns a motel (land and buildings) which he uses to carry on a motel business. The motel provides room cleaning, breakfast, in-house movies, laundry and other services as part of the business. Guests staying in the motel do not receive exclusive possession, but simply have a right to occupy a room on certain conditions. The usual length of stay by guests is between one and seven nights. The motel would be an active asset because its main use is not to derive rent.
End of exampleThe following is considered use of the asset to derive rent, where the rent is derived:
- from an entity that is not an affiliate or connected with the asset owner (third party), or
- by an entity that is an affiliate or connected with the asset owner (relevant entity).
The use of the asset to derive rent from a third party will be considered use to derive rent, even if that entity uses the asset in their business. This is because the use of the asset by the asset owner is to derive rent.
However, use of the asset by a relevant entity is treated as the use by the asset owner, even if the asset owner receives rent from the relevant entity for the use of that asset.
This means, if the relevant entity uses the asset:
- in its business, that use is treated as use by the asset owner to carry on business
- to derive interest, rent, royalties, or foreign exchange gains from an entity that is a third party, that use is treated as use by the asset owner to derive passive income.
Example
Kiki owns a property and rents out 90% of the floor area to Lost Dog Pty Ltd that is neither her affiliate nor connected with her (that is, a non-related third party). Kiki earns 90% of the revenue derived from owning the property from renting it to Lost Dog Pty Ltd.
Beaglehole Pty Ltd, which carries on a dog-grooming business, uses the remaining 10% of the floor area of the property as its business premises and pays Kiki rent for using it – this rent forms 10% of the revenue Kiki earns from owning the property. As Kiki owns 60% of Beaglehole Pty Ltd, Beaglehole is connected with Kiki.
Beaglehole Pty Ltd’s use of that 10% of the property is treated as Kiki’s use because Beaglehole Pty Ltd is connected with Kiki. Because Beaglehole uses that part of the property as its business premises, Kiki is treated as using that part as business premises. This means that the rent Beaglehole Pty Ltd pays to Kiki is not treated as rent for the purposes of determining Kiki’s main use of the property.
However, Kiki’s main use of the property is to derive rent, because 90% of the revenue she derives from the property is rent received from Lost Dog Pty Ltd, a non-related third party.
Kiki’s property is not an active asset in these circumstances.
End of exampleExample
Neil owns a property that is used as follows:
- 60% of the floor area is rented to an affiliate, Andrea
- 15% of the floor area is used in Neil's business
- 25% remaining is used for his own personal use.
Because personal use of an asset by the owner or an affiliate of the owner is ignored in determining its main use, the proportions of 60% and 15% have to be adjusted to represent a proportion of the whole use of the asset excluding the personal use.
This adjustment is made by multiplying the 60% and 15% each by 100/75 [that is, 100/(60 + 15)].
Following the adjustments, Neil:
- rents 80% (that is, 60% × 100/75) of the non-personal use floor area of the property to Andrea
- uses 20% (that is, 15% × 100/75) of the non-personal use floor area in his business.
Andrea uses 50% of the 80% space rented to her in her business and rents the remaining 50% of the space to an entity that is neither Neil’s affiliate nor connected with Neil (non-related third party). Andrea earns 50% of the revenue she derives from the property from her on-renting to the non-related third party.
Andrea’s business use of the property is treated as Neil’s use because she is his affiliate. Therefore, Neil is treated as:
- renting 50% of 80% of the property to a non-related third party
- using 50% of 80% in a business carried on by Neil.
The main use of the property is not to derive interest, an annuity, rent, royalties or foreign exchange gains. This is because:
- 40% (that is, 80% × 50%) is treated as being used to derive rent from the non-related third party, and
- the remaining 60% is either
- actually used in Neil’s business (20%), or
- is treated as being used in a business carried by Neil (40%).
Neil’s property is an active asset in these circumstances. Neil’s asset would still have to satisfy the active asset test over the period that he has owned the asset.
End of example