Relevance

The Active Asset Test is one of the basic requirements that must be satisfied by an entity to gain access to the Small Business CGT Concessions.

If the Active Asset Test is not satisfied, then the Small Business CGT Concessions should not be available.

Active Asset Test

The Active Asset Test is applied to the relevant CGT asset.

A CGT asset satisfies the Active Asset Test if, in broad terms, the asset is an active asset for at least half of the entity’s ownership period of the asset.

Where the asset has been owned for more than 15 years, the asset only needs to be an active asset for at least 7 ½ years.

The ownership period begins at the time when the entity acquired the asset and generally ends at the time of the CGT event.

Active assets

A CGT asset should be an active asset at a particular time where the entity owns the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by the entity or the entity’s connected entities and affiliates.

Also, intangible assets should be active assets where they are inherently connected with a business that is carried on by the entity or the entity’s connected entities and affiliates.

However, there are some exceptions regarding which assets can be active assets.

I won’t cover them all, but in general the main exceptions include:

1. Shares in companies or interests in unit trusts unless those shares or interests satisfy specific tests which are discussed below;

2. Financial instruments including loans; and

3. Assets that are mainly used to derive interest, annuities, rent, royalties or foreign exchange gains.

Application to shares in companies and interests in trusts

There are two main requirements that need to be satisfied for a share in a company or a unit in a unit trust to be an active asset at a particular time.  They are:

1. Either the company is an Australian resident company, or the unit trust is a resident unit trust for CGT purposes; and

2. The market value of certain specified assets of the company or unit trust are 80% or more of the market value of all of the assets of the company or unit trust.

Those specified assets include:

1. Underlying active assets;

2. Financial instruments inherently connected with the entity’s business; and

3. Any cash inherently connected with the entity’s business.

Disclaimer – The above is intended as commentary and general information only.  It should not be relied upon as taxation advice.  Formal taxation advice should be sought for particular transactions or on matters of interest arising from the above.