Active Asset Test for Small-Business CGT Relief

The active asset test checks whether your client’s asset has enough qualifying business use during its ownership history. Passing it is one condition for small-business capital gains tax (CGT) relief. Record the asset-use timeline and the applicable eligibility gateway before choosing a concession.

Start With the Small-Business CGT Conditions

Assess the capital gain, the taxpayer’s eligibility gateway and the active asset test separately. A property used in a business can pass the asset test while its owner fails another basic condition.

For an ordinary disposal, identify the CGT event and whether it produces a capital gain. Then establish a gateway under section 152-10 of the Income Tax Assessment Act 1997. The usual CGT small business entity gateway requires a business and aggregated turnover below $2 million. The alternative maximum net asset value gateway allows relevant net CGT assets of $6 million or less. Specific gateways also cover partnership assets and qualifying assets held outside the operating business.

Use the aggregated turnover calculation to identify which business receipts enter the turnover gateway. The broader small business entity threshold is not automatically the threshold for every CGT concession.

The legislated change to the 50% active asset reduction removes the separate $2 million restriction for assessments from the standard 2027-28 income year. The ordinary small business entity requirements still apply. Other concessions retain their own conditions. For a substituted accounting period, match the assessment to the amending Act’s application provision. Record the income year and concession before applying a turnover threshold.

Which Assets Can Be Active Assets

An asset can be active when its owner uses it, or holds it ready for use, in a qualifying business. That business can belong to the owner, an affiliate or a connected entity. An owned intangible asset, such as goodwill, can qualify through its inherent connection with that business.

Business premises therefore need evidence of their actual use and business user. Ownership by a family member or another group entity does not prove the required relationship. Special affiliate rules can apply to spouses and children under 18 where an asset is used in another entity’s business. Record the ownership and business links before applying those rules.

The ATO’s active asset guidance distinguishes qualifying business assets from excluded assets. Financial instruments are generally excluded. An asset mainly used to derive interest, rent, royalties, annuities or foreign exchange gains is generally excluded too. Statutory exceptions include temporary rent use and certain substantially developed intangible assets.

Consider these hypothetical property cases:

• Incorrect: a company treats its long-term residential rental as active because it also operates an unrelated trading business. That other business does not establish business use of the rental property.
• Correct: a property owner examines a workshop leased to its connected trading company. The company’s workshop use is treated as the owner’s use when applying the main-use exclusion. Confirm the connection and use history before counting qualifying periods.

For mixed uses, keep floor plans, leases and income records. The main-use assessment depends on the circumstances. A rental label alone does not settle whether payments are rent or whether a temporary-use exception applies.

Shares and trust interests have separate asset-composition rules. The company or trust’s business does not, by itself, make every share or interest an active asset.

Work Through the Asset’s Use History

Build the active asset test from elapsed qualifying periods, including gaps and changes of use. Under section 152-35, an asset owned for 15 years or less must be active for at least half the test period. For ownership exceeding 15 years, it must be active for at least 7½ years during that period.

1. Identify acquisition and CGT event times from the transaction records. For an ordinary contracted sale, establish the event time from the contract instead of assuming settlement controls it.
2. Set the test period. It normally runs from acquisition to the CGT event. It ends earlier at business cessation where cessation occurs within 12 months before the event, or a longer period the Commissioner allows.
3. Split the period whenever the business user, ownership relationship or asset use changes. Count periods held ready for qualifying use only where the evidence supports that status.
4. Add the qualifying periods and compare them with the required duration. Active periods can be separate, and the asset need not be active immediately before disposal.

Hypothetical Use Timelines

These examples assume no rollover history. Rental periods are long-term leases to unrelated tenants, with no qualifying business use or temporary-rent exception.

Example	Ownership and use	Required active time	Result
Passing workshop	Owned for 12 years: seven years in the owner’s business, then five years rented	Six years	Seven years exceeds six years, so the active asset test passes
Failing workshop	Owned for 12 years: five years in the owner’s business, then seven years rented	Six years	Five years falls short, so the active asset test fails

In the passing example, assume the owner’s business continues elsewhere after leaving the workshop. Leaving that property does not trigger the business-cessation endpoint. The same assumption applies to the failing example.

If a business instead ceases after eight years and the asset is sold six months later, the test period can end at cessation. Record why cessation qualifies for the earlier endpoint. A sale more than 12 months later needs the Commissioner’s longer-period allowance to use that endpoint.

Check the Maximum Net Asset Value Test

The maximum net asset value test measures relevant net CGT assets immediately before the CGT event. It uses market values and statutory adjustments. Balance-sheet equity alone cannot establish the result.

Start with the taxpayer’s CGT assets and those of connected entities. Apply the restricted inclusion rules to affiliates and entities connected with affiliates. Their assets generally enter only where used or ready for use in the taxpayer’s business or a directly connected entity’s business. Exclude the specified assets of entities connected only through an affiliate.

The ATO’s maximum net asset value guidance explains why a valuation schedule needs more than the asset being sold. Include relevant investment assets and goodwill, even where they do not qualify as active assets.

For each included entity, show market values less related liabilities and permitted provisions. The specified provisions cover annual leave, long service leave, unearned income and tax liabilities. Identify the relationship between each liability and the included assets.

Apply the material exclusions and adjustments:

• Disregard specified equity interests in connected entities to avoid double counting underlying assets. Debt interests are treated differently, and related liabilities need their statutory treatment.
• For individuals, exclude assets used solely for personal enjoyment and qualifying superannuation rights. The individual’s life insurance policy is also excluded.
• Apply the main-residence exclusion with its income-producing-use adjustment. A home used to produce assessable income can require a reasonable inclusion and corresponding liability adjustment.
• Where partnership assets or look-through earnout rights are involved, apply their specific valuation rules before completing the total.

For a hypothetical completed schedule, assume all required entities and adjustments produce market values of $7.2 million and allowable deductions of $1.4 million. Net CGT assets are $5.8 million, so that gateway passes. If the same schedule omits $400,000 of relevant goodwill, the corrected total is $6.2 million and the gateway fails.

Keep valuation support for the event time, not just a later sale statement. A failed net asset test can still leave another gateway available. It does not change whether the disposed asset passes its use-history test.

Recognise the Modified Active Asset Test

A modified active asset test applies to CGT event D1 because creating a right does not involve selling an asset the creator previously owned. Section 152-12 instead requires the created right to be inherently connected with another asset of the creator that satisfies the active asset test. Identify that existing asset and substantiate its qualifying history.

Shares and trust interests require a different modification. The ordinary active-asset rules include an 80% market-value test for qualifying resident companies and trusts. Its numerator includes active assets and business-connected cash or financial instruments. Further basic conditions apply a modified look-through assessment to interposed entities.

For a share or trust-interest disposal, retain the asset-composition calculations, participation percentages and entity eligibility tests. Examine the CGT concession stakeholder or 90% participation condition. If the seller fails the maximum net asset value test, the additional carrying-on-business condition also needs attention. Cash introduced to help satisfy the test cannot simply be counted as qualifying business cash.

Rollover history can alter the ownership and use timeline. Section 152-45 carries specified history into replacement assets after compulsory acquisition, loss or destruction. A relationship-breakdown rollover has its own choice about carrying forward the transferor’s history. Retain the earlier records and any choice instead of starting automatically at the latest transfer.

Retain an Eligibility Working Paper

Retain one working paper that connects the legal conclusion to the client’s documents. The Division 152 provisions distinguish the basic conditions from each concession’s further requirements.

Record the following items:

• Taxpayer, asset, ownership interest, CGT event and event time.
• Business user, affiliate or connected-entity basis, with the supporting ownership records.
• Acquisition, changes of use, cessation and disposal evidence, plus any rollover history or choices.
• Test-period start and end, qualifying intervals, total active duration and required duration.
• Gateway selected, relevant income year, group calculation and valuation schedule where required.
• Special conditions, excluded-asset analysis and the evidence for any exception.
• Factual questions still awaiting client evidence, the staff member responsible and the conclusion those answers could change.

Attach the contract, use-history records and calculation schedules. Where evidence is missing, state which condition remains unresolved instead of recording an unconditional pass.

Once the basic conditions are supported, assess the chosen concession’s further requirements. Use the small business retirement exemption guide where that is the proposed choice. Keep disposal arithmetic in the separate capital gains tax calculator. A calculated gain supplies an amount to assess. The eligibility working paper supplies the evidence for the relief claimed.