Relevance

There are many basic requirements which need to be satisfied by an entity to gain access to the Small Business CGT Concessions.

And of those basic requirements, either the Maximum Net Asset Value Test or the CGT Small Business Entity Test or would need to be satisfied.

If neither of those tests are satisfied, then the Small Business CGT Concessions should not be available.

What is the test

It is a comparison of the net asset values of the taxpayer and the taxpayer's connected entities and affiliates to a threshold amount of $6,000,000.

If the combined net asset values are $6,000,000 or less, the test is satisfied.  If more than $6,000,000, the test is failed.

What assets are included

To start with, include all assets of the taxpayer and the taxpayer's connected entities and affiliates.

This includes:

1. Intangible assets (such as goodwill and intellectual property);

2. Loan receivables (including shareholder and director loans); and

3. Unpaid present entitlements from trusts.

We then exclude certain assets.

We exclude interests in connected entities and affiliates.  This is on the basis that their assets will already be included directly, and so we don't want to double count those assets by including them once directly, and then again as they make up the value of the interest in the connected entity or affiliate (such as shares in a company).

Specifically for individuals, we exclude:

1. Personal use assets;

2. Main residence and adjacent land in most circumstances;

3. Superannuation; and

4. Life insurance policies.

Personal use assets are assets which are used solely for the personal use and enjoyment of the individual.  The ATO tends to allow this to extend to the personal use of the individual's spouse and children in certain circumstances.

The main residence and adjacent land are excluded where:

1. The adjacent land was used primarily for private purposes;

2. The land is no more than 2 hectares in size; and

3. The main residence has not been used for income producing purposes during the course of the individual's ownership period such that interest costs, if any, would not have been deductible.  The Commissioner’s view is that interest expenses may be deductible where an area of the main residence has the character of a place of business.

As such, an amount can still be included in the net asset values for a main residence and adjacent land if:

1. The land was not used primarily for private purposes;

2. The land is more than 2 hectares in size; or

3. The main residence or land was used for income producing purposes.

The amount included is the amount that is reasonable given the circumstances.  So, for example, if the main residence and adjacent land is 3 hectares in size, with all land having equal value (such as flat useable land with good access), all used for private purposes, and never used for income producing purposes, then arguably only 1/3rd of the value of the land should be included in the Net Asset Values, being the value of the 1/3rd of the land that exceeds the 2 hectare size limit.

What value those assets are included at

Assets should be included at market value.  They should not be included at historic cost or book value (unless that is the same as market value).

You should also ensure you have support for the market values adopted.

What liabilities are included

Once we have determined which assets are included, and the market value of those assets, we need to work out which liabilities can be included to reduce the net asset value amount.

We include liabilities that relate to the included (but not excluded) assets.

If a liability doesn't relate to the included assets, then it shouldn't be included as a reduction to the net asset value amount.

The ATO accepts that liabilities relating to the included assets of an entity generally (as opposed to one particular asset) can still be included.  The ATO provides examples of this being bank overdrafts and other short-term financing facilities.

Contingent liabilities can also be included in certain circumstances.  This includes contingent sales commissions payable to say a business broker or a real estate agent.

Certain liabilities are also specifically included.  They are provisions for:

1. Annual leave;

2. Long service leave;

3. Unearned income; and

4. Tax liabilities.

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.