You may qualify for the small business CGT concessions if you satisfy the maximum net asset value test where the total net value of CGT assets owned by certain entities does not exceed $6 million just before the CGT event that results in the capital gain for which the concessions are sought. The limit is not indexed for inflation. You must include the net value of CGT assets owned by:
- you
- any entities connected with you,
- any of your affiliates and entities connected with your affiliates (subject to the note below).
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 if it is used in the business of an entity that is connected with you only because of your affiliate.
Example
Colin operates a newsagency business as a sole trader. Simon carries on his own florist business, which is unrelated to the newsagency business. Simon owns the land and building from which the newsagency is conducted and leases it to Colin. Simon also owns 100% of the shares in Simco Pty Ltd, which carries on another separate business. Simon is connected with Simco Pty Ltd because he controls the company. Simon regularly consults Colin for advice in his business affairs and acts according to Colin’s wishes – therefore, Simon is Colin’s affiliate.
To determine whether he satisfies the maximum net asset value test, Colin includes the market value of the land and building owned by Simon (because it is used in his newsagency business) but does not include Simon’s other assets used in his florist business (because they are not used in the newsagency business). Nor does Colin include Simco’s assets, because those assets are not used in his business and Simco Pty Ltd is only connected because of his affiliate, Simon.
End of exampleMeaning of net value of CGT assets
The net value of the CGT assets of an entity is the amount (whether positive, negative or nil) worked out by taking the sum of the market values of those assets less any liabilities of the entity that are related to those assets and provisions made for:
- annual leave
- long service leave
- unearned income
- tax liabilities.
Partner in a partnership
If you are a partner in a partnership and the CGT event happens in relation to an asset of yours or a CGT asset of the partnership (for example, disposal of a partnership asset) the maximum net asset value test would include:
- all the assets of the partnership if you are connected with it, and you would exclude the value of your interest in the partnership, or
- only your interest in the partnership if you are not connected with it, and you would not count the assets of the partnership as a whole.
Entities that hold shares or trust interests would calculate their maximum net asset value test in a similar way.
Assets included in the net value of CGT assets
Assets to be included in determining the net value of the CGT assets are not restricted to business assets. They include all CGT assets of the entity, unless the assets are specifically excluded (see Assets not included).
In the case of a dwelling that is an individual's main residence, the individual only includes the current market value of the dwelling in their net assets to the extent that it is reasonable, having regard to the amount that the dwelling has been used to produce assessable income which gives rise to deductions for interest payments, or would give rise to deductions for interest if interest had been paid.
The individual would be entitled to deduct part of the interest on money they borrowed to buy the home if:
- part of the home is set aside exclusively as a place of business and is clearly identifiable as such, and
- that part of the home is not readily adaptable for private use, for example, a doctor’s surgery located within a doctor's home.
This is a hypothetical interest deductibility test. If the individual did not actually incur any interest, the test looks at whether they would have been entitled to a deduction if they had taken out a loan to purchase their home.
If the dwelling has had some income-producing use, the percentage of income- producing use is multiplied by the current market value to work out the value of the dwelling that should be included. This will take into account the length of time and percentage of income-producing use of the dwelling.
Example
Ben owns a house that has a market value of $750,000 just before applying the net assets test. Ben owned the house for 12 years; for the first three years, 20% of it was used for producing assessable income; for the following two years, it was used 40% for producing assessable income; for two years, it was used solely as a main residence; and for the last five years, it was used 10% for producing assessable income.
Ben’s dwelling has had 15.8% income-producing use:
(3/12 x 20%) + (2/12 x 40%) + (2/12 x 0%) + (5/12 x 10%)
Ben will include $118,500 in his net assets ($750,000 x 15.8%).
Ben has a liability of $500,000 attached to the house, therefore 15.8% ($79,000) of the liability is also included in the calculation of the net assets.
Although gains from depreciating assets may be treated as income rather than capital gains, depreciating assets are still CGT assets and are included when calculating the net asset value.
End of exampleLiabilities included in the net value of CGT assets
Liabilities to be included in determining the net value of the CGT assets include:
- legally enforceable debts due for payment
- presently existing legal or equitable obligations to pay either a certain sum or ascertainable sums
Examples of amounts that are not included in 'liabilities' for the purposes of determining the ‘net value of the CGT assets’ of an entity include:
- provisions for possible obligations to pay damages in a pending lawsuit
- provisions for liabilities in respect of an earn-out contract
- provisions for the guarantee of a loan
- provisions for long service and annual leave entitlements
- provisions for income and other taxes prior to liability arising
- accounting liabilities arising as a result of receiving prepaid income
- provisions in general, for such things as quantity rebate and the like.
Liabilities related to assets
A liability must be related to the CGT assets of an entity to be taken into account in determining the net value of the CGT assets of the entity.
This includes liabilities directly related to particular assets that are themselves included in the calculation, for example, a loan to finance the purchase of business premises. It also includes liabilities not directly related to a particular asset but rather to the assets of the entity more generally – for example, a bank overdraft or other short-term financing facility that provides working capital for the operation of the business. However, liabilities that are directly related to an asset that is excluded from the net asset calculation cannot be included – but certain liabilities related to excluded interests in connected entities may be counted.
Example
|
Assets: |
$ |
$ |
|
Plant and machinery |
1,500,000 |
|
|
Freehold premises |
3,500,000 |
5,000,000 |
|
Liabilities: |
|
|
|
Mortgage (secured over the premises) |
2,000,000 |
|
|
Provision for leave of employees |
500,000 |
|
|
Provision for rebates |
200,000 |
|
|
Provision for possible damages payout |
100,000 |
2,800,000 |
|
Net assets: |
|
2,200,000 |
|
Assets: |
$ |
$ |
|
Plant and machinery |
1,500,000 |
|
|
Freehold premises |
3,500,000 |
5,000,000 |
|
Liabilities: |
|
|
|
Mortgage (secured over the premises) |
2,000,000 |
|
|
Provision for leave of employees |
500,000 |
2,500,000 |
|
Net value of CGT assets: |
|
2,500,000 |
The following items are not taken into account in working out the net value of the CGT assets of Cool Tool Pty Ltd because they are not within the meaning of the term 'liabilities':
- provision for possible damages payout
- provision for rebates.