Capital gains
Active asset
An active asset is a CGT asset used, or held ready for use, in carrying on a business, and it is a basic requirement for the small business CGT concessions.
The idea of an active asset sits at the centre of the small business CGT concessions. To use any of those concessions, the asset you are selling must be an active asset at the time of the CGT event. In simple terms, it is an asset you use in your business, or hold ready for use in your business, as opposed to an asset held mainly as an investment.
Typical examples include the premises you operate from, plant and equipment, vehicles used in the business and the goodwill of the business. Intangible assets such as goodwill count if they are inherent in the business. By contrast, assets whose main use is to produce rent, interest, dividends or similar passive income are generally excluded, with limited exceptions. Shares and financial instruments are also specifically excluded in most cases.
Ownership duration affects the test. If you have held the asset for 15 years or less, it must have been an active asset for at least half of the ownership period. If you have held it for longer than 15 years, it must have been an active asset for at least 7.5 years. This means an asset that was used for business for only a short part of the time may fail the test even if it is active on the day of sale.
A business premises is one of the most commonly examined assets. If you own a building that your business uses, it is generally an active asset. If you lease part of it to a third party for rent, that part may be treated differently, and the position depends on the facts. A dwelling is generally not an active asset unless it is used mainly in carrying on a business.
Shares in a company or interests in a trust can be active assets if the entity is carrying on a business, and the connected business assets pass the required tests, for example that the active asset percentage meets the legislated threshold. These tests look through to the underlying assets of the company or trust, and so need careful analysis before a sale.
Active asset status concerns CGT only. Your business assets may also be capital purchases for GST and depreciation purposes, which follow their own rules. Keep records showing how and when each asset was used. This is general information only, so confirm your assets qualify with the ATO or a registered tax professional.
Worked example
Lucy owns a delivery van used entirely in her courier business for 6 years, then sells it to upgrade. For an asset owned 15 years or less, it must be active for at least half the ownership period, which is 3 years, and it was active for all 6. The van is an active asset. By contrast, a rental flat she owns for investment would not be an active asset.
Practical tips
- Keep a record of how each business asset has been used over time, since the test looks at the ownership period.
- Be careful with mixed-use property, because parts leased to others or used privately may not count.
- Remember an asset that is active on the day of sale can still fail if it was not active for enough of the time you owned it.