The basic version of the active asset test applies to all CGT assets.
Active Asset Test
The active asset test is an important part of the basic conditions to qualify for the small business CGT concessions.
But there are two versions of the test. If the CGT assets are shares or units, you need to pass the modified active asset test as well as the ‘basic’ test. If there are no shares or units invovled, the ‘basic’ test is all you need to worry about.
So let’s look at the ‘basic’ test that all assets need to pass if they want to qualify for the small business CGT concession. We will cover the modified active asset test in another article.
‘Basic’ Active Asset Test
It all starts with 152-1 (d) ITAA97.
152-10(1): A capital gain …may be reduced or disregarded … if ..:
(d) the CGT asset satisfies the active asset test…
And so here comes the active asset test.
s152-35: (1) A CGT asset satisfies the active asset test if:
(a) you have owned the asset for 15 years or less and the asset was an active asset … for …at least half of the period ..; or
(b) you have owned the asset for more than 15 years and the asset was an active asset … for …at least 7 1 / 2 years ….
This is the basic rule and that hasn’t changed. Let’s go through this in more detail.
Active Asset
An asset is an active asset when used or held ready for use in the course of carrying on a business.
And it must be you as the entity itself using the asset. Or if it isn’t you, then a connected entity, affiliate, spouse or child under 18.
Inherently Connected
You can’t ‘use’ an intangible asset as such in the course of carrying on a business.
You can’t say, ‘Today I use my goodwill but not tomorrow. This week I will use the benefit of the non-compete clause but not next week”.
So instead a different concept applies. To be an active asset an intangible asset needs to be inherently connected with your business. Or the business of a connected entity, affiliate, spouse or child under 18.
Test Period
To satisfy the active asset test, the CGT asset must be active for at least half of the test period. For example, if a CGT asset was purchased on 1 January 2014 and sold on 1 January 2020, it must be active for at least three years.
There is a cut-off in this rule though. And the cut-off is 7.5 years. Once you owned the asset for more than 15 years, being active for 7.5 years is enough. It doesn’t need to be more than 7.5 years.
The test period begins when you acquire the asset and ends with the CGT event.
If you don’t sell a going-concern but do an asset sale, meaning you closed the business down before the sale, the test period ends at that time as long as it is within 12 months of the actual CGT event. The Commissioner might allow a longer period than 12 monts.
Not Active
Certain assets are not regarded as active assets per ss152-40 (4).
Shares and Units
Shares in a company or interests in a trust are not active by definition.
s152-40 (4):…the following CGT assets cannot be active assets : …
(b) shares in a company…
(c) interests in a trust….
But there are a number of exceptions. And the main one is the active asset test in s152-40 (3). If share or trust interests pass the active asset test, then they count as active assets.
Financial Instruments
By definition financial instruments are not active assets. Financial instruments include bank accounts, loans, debts, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts and options, but not trade debtors.
152-40 (4): …the following CGT assets cannot be active assets: …(d) financial instruments…;
But this one is confusing. Financial instruments don’t count as active assets (unless they are trading stock). So you can’t claim a CGT concession for these.
But when you try to satisfy the 80% test for shares and units, they are treated as if they were active and included in the 80% test when inherently connected with the business.
Passive Income
And assets are not active assets either when their only purpose is to derive passive income.
152-40 (4): …the following CGT assets cannot be active assets: ...(e) an asset whose main use … is to derive interest, an annuity, rent, royalties or foreign exchange gains…
But there are two exceptions.
152-40 (4)…unless: (i) the asset is an intangible asset and has been substantially developed, altered or improved by you so that its market value has been substantially enhanced; or (ii) its main use for deriving rent was only temporary.
Shares and Units
So up to now this was the ‘basic’ active asset test. All CGT assets need to pass this test. They need to be active assets for at least half of the test period or 7.5 years whichever is shorter.
But if the CGT assets are shares or units, passing this basic active asset test is not enough. In addition they need to pass an additional test, the so-called 80% test to determine whether they count as active assets or not.
This test only applies to shares and units. And it is not new. But how this 80% test actually pans out has changed under the new rules. There are three major changes that give the modified active asset test its specific flavour. But we will cover that in a different article.
MORE
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.