Introduction
One of the key basic conditions to access the small business CGT employee share scheme concessions is that the relevant CGT asset subject to the particular CGT event (generally CGT event A1 on disposal) satisfies the active asset test.
What is the active asset test?
The active asset test requires that the relevant CGT asset was an active asset for:
where it was held for up to 15 years – at least half the relevant period (generally, between acquisition and disposal); and
where it was held for more than 15 years – at least 7.5 years.
What is an active asset?
A CGT asset is an active asset if:
you own the asset, and it is used, or held ready for use, in carrying on business that carried on by:
you;
a connected entity (Connected Entity); or
an affiliate (Affiliate); or
if the asset is an intangible asset – you own it, and it is inherently connected with a business that is carried on (whether alone or in partnership) by:
you;
a Connected Entity; or
an Affiliate.
The most common example of an intangible asset that is an active asset is goodwill.
Exceptions to active asset treatment
Notwithstanding the general definition of an active asset above, an asset whose main use is to derive interest, an annuity, rent, royalties or foreign exchange gains unless:
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
its main use for deriving rent was only temporary.
What constitutes main use is a question of fact and requires a comparison as between:
the respective areas of use; and/or
the respective level of income generated by the various activities (see Taxation Determination TD 2006/78).
Exception to the exception to active asset treatment
Notwithstanding the exception for assets whose main use is to derive rent, the ATO accepts that a CGT asset (i.e., real property) leased by a taxpayer to a Connected Entity for use in the Connected Entity’s business is an active asset (see Taxation Determination TD 2006/63).
For more information in this regard, see our article here.
Special rules for shares in a company or interests in a trust (including units)
Where the relevant CGT assets subject to the CGT event (e.g., CGT event A1 on disposal) are shares in a company or interests (including units) in a trust, special rules apply.
It is important to note that the relevant company or trust must be an Australian resident, that is:
for companies – either:
it is incorporated in Australia; or
not being incorporated in Australia, both:
carries on business in Australia; and
either:
has its central management and control (CMC) in Australia; or
has its voting power controlled by Australian resident shareholders; and
for trusts:
other than unit trusts – either:
any trustee is an Australian resident; or
the CMC of the trust is in Australia; and
for unit trusts – one of the requirements of Column 1 and one of the requirements in Column 2 of the table below are met
