Death and small business CGT concessions

Assets and death

When a person dies, their assets devolve (are transferred) to their legal personal representative (LPR) or are acquired by a surviving joint tenant, where the deceased owned those assets as joint tenants with another person. In effect, there is a change of ownership of the assets and, therefore, a CGT event (being a disposal) happens. However, any capital gain or capital loss from this CGT event is disregarded, as is any capital gain or loss that:

• the LPR makes when the asset passes to a beneficiary in the estate, or
• that is made as a result of the asset being acquired by a surviving joint tenant.

The LPR, beneficiary or surviving joint tenant is taken to have acquired the assets on the date of death. Generally, the cost base of the assets is transferred to the assets in the hands of the LPR, beneficiary or joint tenant. However, market value is used if the deceased acquired the assets before 20 September 1985.

In effect, with the disregarding of any capital gain upon death and transferring the cost base upon death of the asset owner, any unrealised capital gain is deferred until a later sale of the asset by the LPR, beneficiary or joint tenant.

The LPR or beneficiary of the deceased estate will be eligible for the small business CGT concessions where:

• the asset is disposed of within two years of the date of death (although the Commissioner may allow a longer period by granting an extension of time), and
• the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before his or her death.

Provided these conditions are satisfied, the CGT small business concessions are also available to the trustee of a trust established by the will of the deceased, a beneficiary of such a trust, and a surviving joint tenant.

For the retirement exemption, there is no need for the amount to be paid into a superannuation fund, even if the deceased was less than 55 years old just before his or her death.

The 15-year exemption can also be chosen if the deceased had met the requirements, except that it is not necessary for the CGT event to have happened in relation to the retirement of the individual.

Disposal of asset after two-year time limit

If a person carrying on a business dies and their assets devolve to their LPR, beneficiary, surviving joint tenant, or trustee or beneficiary of a testamentary trust (the transferee), the active asset test is applied to the transferee in relation to any capital gain made on a sale of the assets after the two-year time limit (or such further time that the Commissioner allows).

This means that if the transferee does not continue to carry on the deceased's business, or use the asset is another business, after the two-year time limit, the active asset test may not be satisfied and the small business concessions may not be available.

Death and a previous small business rollover

If, just before dying, a person still owned a replacement or capital improved asset from an earlier small business rollover, CGT event J2 will happen upon the person's death. This is because the replacement or capital improved asset will stop being the deceased's active asset, having devolved to their LPR.

However, the general rules concerning death, in addition to disregarding any capital gain made on the replacement asset from CGT event A1, will also disregard the capital gain from CGT event J2. Although any capital gain from CGT event A1 is effectively deferred until a later sale of the asset by the LPR or beneficiary, the capital gain from CGT event J2 is not transferred to the LPR or beneficiary. This means that the capital gain from CGT event J2 is permanently disregarded under the general rules concerning death.

What CGT records do you need to keep?

You must keep records of everything that may be relevant to working out whether you have made a capital gain or capital loss from a CGT event of an asset.

This means you need records to substantiate the purchase and disposal of any asset, as well as other costs relating to the asset. Records can include contracts, valuations, and details of commissions and legal fees you paid. Penalties can apply if you do not keep the records for at least five years after the relevant CGT event. If you use information from those records in a later tax return, you may have to keep records for longer. If you have applied a net capital loss, you should generally keep your records of the CGT event that resulted in the loss until the end of any period of review for the income year in which the net capital loss is fully applied.

The records must:

• show the nature of the act, transaction, event or circumstance, and the date it happened
• be in English, or in a form that can be readily translated into English.

If you do not keep proper CGT records you might have to pay:

• extra expenses to establish the cost of an asset when you dispose of it
• more tax than necessary.

CGT asset register

You might find that a simpler way to keep records of assets is to keep a CGT asset register. This is a register of information about your CGT assets that you have transferred from your CGT records (for example, invoices, receipts and contracts).

For most assets this information includes:

• the date you acquired the asset
• the cost of the asset
• a description, amount and date for each cost associated with purchasing the asset (for example, stamp duty and legal fees)
• the date the asset was disposed of
• the amount you received when you disposed of the asset
• any other information relevant to working out your CGT obligation.

You can discard your CGT records five years after having an asset register entry certified if you meet all of the following:

• you enter all the necessary information about an asset in your CGT asset register
• the entry is in English and is certified in writing by an approved person (for example, a registered tax agent)
• the asset register entry is certified after 31 December 1997 (although you may have acquired the asset before this date).

If you do not keep an asset register, you generally have to keep CGT records for at least five years after you dispose of an asset. For example, if you hold an asset for 10 years and then sell it, you would have to keep the records for 15 years.

Definitions

Active asset
A CGT asset is 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    
  • you
  • your affiliate
  • your spouse
  • your child under 18
  • an entity connected with you
   
• an intangible asset inherently connected with a business carried on (whether alone or in partnership) by    
  • you
  • your affiliate
  • your spouse
  • your child under 18
  • an entity connected with you.
   

Goodwill is an example of an intangible asset.

Active asset test
This test requires the CGT asset to be an active asset for half a particular period. It is one of the tests you must pass to meet the basic conditions for the small business CGT concessions.

Affiliate
An affiliate is an individual or a company who, in relation to their own business affairs, acts or could reasonably be expected to act in either of the following ways:

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

Aggregated turnover
Aggregated turnover is your annual turnover plus the annual turnovers of any entities you are connected with or that are your affiliates. We call these ‘relevant’ entities.

Assessable income
This is all the income you have received that you must include in your income tax return. Generally, it does not include non-assessable payments from a unit trust, including a managed fund.

Capital gain
You may make a capital gain (or profit) as a result of a CGT event, for example, when you sell an asset for more than you paid for it. You can also make a capital gain if a managed fund or other unit trust distributes a capital gain to you.

Capital gains tax
Capital gains tax (CGT) is the tax you pay on any capital gain you make and include in your annual income tax return. For example, when you sell (or otherwise dispose of) an asset, you may be subject to CGT.

Capital loss
Generally, you make a capital loss because of a CGT event if you sell an asset for less than you paid for it (including incidental costs).

Capital proceeds
Capital proceeds is the term used to describe the amount of money or the value of any property you receive or are entitled to receive as a result of a CGT event. For shares or units, capital proceeds may be any of the following:

• the amount you receive from the purchaser
• the amount you receive from a liquidator
• the amount you receive on a merger or takeover
• their market value if you give them away.

CGT asset
CGT assets include shares, units in a unit trust, collectables (such as jewellery), assets for personal use (such as furniture or a boat) and other assets (such as an investment property).

CGT asset register
This is a register of information about your CGT assets that you have transferred from your CGT records (for example, invoices, receipts and contracts).

CGT concession stakeholder
A CGT concession stakeholder of a company or trust means either of the following:

• a significant individual in the company or trust
• the spouse of a significant individual, where the spouse has a small business participation percentage in the company or trust greater than zero.

CGT discount
The CGT discount allows eligible individuals (including partners in partnerships) and trusts to reduce their capital gain by 50%. There are more rules for beneficiaries who are entitled to a share of a trust capital gain. Companies cannot use the CGT discount.

CGT event
A CGT event happens when a transaction takes place, such as the sale of a CGT asset. The result is usually a capital gain or capital loss.

Connected with
A business is connected with you if either of the following apply:

• you control or are controlled by that entity
• both you and that entity are controlled by a third entity.

Depreciating asset
A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Depreciating assets include computers, electric tools, furniture and motor vehicles.

Maximum net asset value test
To pass this test, you and certain other entities must not own assets with a total net value of more than $6 million just before the CGT event that results in the capital gain.

NAT number
Most of our publications have a NAT number (our catalogue number), which we generally show in brackets after the title of the publication, for example, Guide to depreciating assets (NAT 1966).

Net capital gain
The net capital gain is the difference between your total capital gains for the year and your total capital losses (including net capital losses from prior years), less any CGT discount or other small business CGT concessions you are entitled to.

Net value of the CGT assets
The net value of the CGT assets of an entity is the total market value of its assets (whether positive, negative or nil), less any liabilities relating to those assets and certain provisions.

Relevant entity
Relevant entities include any:

• of your affiliates
• entities connected with you.

Replacement asset period
This period starts one year before and ends two years after the last CGT event that occurs in the income year for which you choose the rollover.

Significant individual
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%.

Small business entity
You are a small business entity if you are a sole trader, partnership, company or trust that meets both of the following:

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

Small business 15-year exemption
This is one of the CGT concessions available to small business. Generally, it allows you to disregard the capital gain you made on an asset you have owned for 15 years if you meet all the conditions.

Small business 50% reduction
This is one of the CGT concessions available to small business. Generally, it allows you to reduce your capital gain by 50% if you meet the basic conditions.

Small business retirement exemption
This is one of the CGT concessions available to small business. Generally, it provides an exemption of capital gains up to a lifetime limit of $500,000 if you meet all the conditions. If you are under 55 years old when you choose the exemption, you must pay the amount into a complying superannuation fund or a retirement savings account.

Small business rollover
This is one of the CGT concessions available to small business. Generally, it allows you to defer all or part of a capital gain from a CGT event that happens in relation to a small business asset for two years, or longer if you do one of the following:

• acquire a replacement asset
• make an improvement to an existing asset and meet certain conditions.

More information

Websites

• For more on the concessions available to small business entities, go to ato.gov.au/sbconcessions
• For more on the CGT concessions for small business entities, go to ato.gov.au/businesscgt
• For more on our range of online services, including Online services for business, go to ato.gov.au/OSB
• For easy access to business information, services and transactions with government, go to business.gov.auExternal Link This has links to ATO applications to    
  • register for an Australian business number (ABN)
  • register for goods and services tax (GST)
  • apply for a tax file number.
   

Phone

Phone us on:

• 13 28 66 for general business enquiries, for information about most small business tax matters, including    
  • GST
  • ABN
  • pay as you go (PAYG) instalments
  • amounts withheld from wages
  • business deductions
  • lodging and paying activity statements
  • activity statement accounts
  • wine equalisation tax
  • luxury car tax
  • fringe benefits tax
  • matters for non-profit organisations
   
• 13 10 20 for superannuation enquiries, for information about    
  • superannuation guarantee
  • choice of superannuation fund
  • superannuation co-contribution
   
• 13 28 61 for general personal tax enquiries, for information about individual income tax
• 1300 720 092 to order our publications.

Publications

For CGT events which happened in earlier years, see:

• Advanced guide to capital gains tax concessions for small business 2013–14
• Advanced guide to capital gains tax concessions for small business 2012–13
• Advanced guide to capital gains tax concessions for small business 2011–12
• Advanced guide to capital gains tax concessions for small business 2010–11
• Advanced guide to capital gains tax concessions for small business 2009–10
• Advanced guide to capital gains tax concessions for small business 2008–09
• Advanced guide to capital gains tax concessions for small business 2007–08
• Advanced guide to capital gains tax concessions for small business 2006–07
• Advanced guide to capital gains tax concessions for small business 2005–06

For more general information about:

• capital gains tax in general, see the Guide to capital gains tax 2014–15.
• market value or market valuation see Market valuation for tax purposes.

The following documents might also help you:

• Division 115 of the Income Tax Assessment Act 1997
• Guide to depreciating assets 2014–15 (NAT 1996)
• Taxation Ruling TR 2002/10 Income tax: capital gains tax: asset register  
• Taxation Determination TD 2007/14 Income tax: capital gains: small business concessions: what 'liabilities' are included in the calculation of the 'net value of the CGT assets' of an entity in the context of subsection 152-20(1) of the Income Tax Assessment Act 1997?
• Taxation Determination TD 2006/65 Income tax: capital gains: small business concessions: can a share in a company or an interest in a trust qualify as an active asset under subsection 152-40(3) of the Income Tax Assessment Act 1997 if the company or trust owns interests in another entity that satisfies the '80% test'?
• Taxation Determination TD 2006/63 Income tax: capital gains: is a CGT asset that is leased by a taxpayer to a connected entity for use in the connected entity's business an active asset under section 152-40 of the Income Tax Assessment Act 1997?
• Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent?
• Taxation Determination TD 2006/71 Income tax: capital gains: small business concessions: is the part of a payment which is a small business 50% reduction amount a non-assessable part under CGT event E4 in section 104-70 of the Income Tax Assessment Act 1997? 

Other services

If you do not speak English well and want to talk to a tax officer, phone the Translating and Interpreting Service (TIS) on 13 14 50 for help with your call.

If you are deaf or have a hearing or speech impairment, contact us through the National Relay Service (NRS). For more information, go to National Relay ServiceExternal Link.

This guide provides information about the capital gains tax (CGT) concessions available to small business.