The small business CGT concessions are subject to common basic conditions, with particular concessions having additional conditions over and above these common requirements.
The basic conditions for small business CGT concessions include:
- a CGT event happens to a CGT asset (for example, the disposal of a CGT asset triggers CGT event A1);
- the CGT event would otherwise trigger a capital gain;
- the taxpayer:
- is a CGT small business entity, that is, broadly, it has aggregated turnover of less than $2,000,000; or
- satisfies the maximum net asset value test (NAVT); and
- the CGT asset sold satisfies the active asset test.
There are additional basic conditions for small business CGT concessions where the relevant disposal relates to shares in a company or interests (including units) in a trust.
There are various defined terms in relation to the eligibility conditions of small business CGT concessions, such as:
- “aggregated turnover”, which includes the turnover of the relevant entity itself, as well as any connected entities or affiliates (which are themselves defined terms);
- the NAVT requires that the relevant entity itself, together with any connected entities or affiliates has net assets of no more than $6m. However, this is not always as straightforward as it appears as:
- once an individual or entity holds at least 40% of another entity (such as a company or trust), you generally include 100% of its market value for the purposes the NAVT, for example, if an individual held 60% of the shares in a company worth $8m and no other assets, their shares are worth $4.8m ($8m x 60%) but as a connected entity you include the full $8m in determining whether they satisfied the NAVT (and would, therefore, fail); and
- the NAVT excludes certain “big ticket” items such as:
- an individual’s main residence;
- an individual’s superannuation interests; and
- purely personal assets (e.g., a holiday home that is not rented out);
- the active asset test, which requires that the relevant asset was an active asset for:
- if the asset was held for 15 years or less – at least half the ownership period;
- if the asset was held for more than 15 years – at least 7.5 years; and
- an active asset is:
- an asset used, or held for use, in the course of carrying on a business that is carried on by the relevant taxpayer, a connected entity or an affiliate; or
- an intangible asset inherently connected with the business carried on by the relevant taxpayer, a connected entity, or an affiliate (e.g., goodwill).
However, notwithstanding the general meaning of an active asset above, certain assets are specifically excluded from being active assets, such as assets whose main use is to derive rent.
This sounds problematic as it would appear to exclude the common structuring scenario whereby a small business operates from premises leased from a related party (e.g., a company leasing a factory or office space owned by its shareholders).
However, the ATO takes the view that the “passive rent” exclusion does not apply (and, therefore, the relevant premises can constitute an active asset) where the premises are leased to a connected entity carrying on the relevant business.
Whilst there have not been any legislative amendments in 2021 in this regard, it is critical to keep up to date with these changes from time to time, as well as any interpretative changes whether at common law or from an administrative (ATO) perspective.
For more information on the small business CGT concessions, see our Explainer Video here.
Contact Mosaic Tax Legal, the experts in ATO small business CGT concessions.