Capital gains
Maximum net asset value test
The maximum net asset value test is one way to qualify for the small business CGT concessions, requiring that your net assets and those of connected entities stay below a legislated limit.
Small business owners can qualify for the CGT concessions in more than one way. One route is to be a small business entity, which is based on turnover. The other is the maximum net asset value test, which looks at how much you own rather than how much you earn. Passing either test, together with the other conditions, gives access to the concessions.
Under the test, the net value of the CGT assets of you, your affiliates and entities connected with you must not exceed a threshold set by legislation, measured just before the CGT event. The threshold can be changed, so check the current figure on the ATO website. This entry does not quote it. Values of assets that are being sold are included in the calculation.
The calculation uses market values rather than the book values or cost base of assets, so you may need valuations. Liabilities that relate directly to the assets are subtracted. This produces a net figure, and if that figure is over the threshold, the test is failed. Because land, goodwill and shares in private companies can be valuable, owners are sometimes surprised by the result.
Certain assets are excluded from the calculation. The most important are your main residence, to a limited extent, and interests in superannuation and life insurance policies. Personal assets used mainly for personal use and enjoyment are also excluded. Excluding these assets lets many people with modest businesses pass the test even though their total wealth is much larger.
The test is about wealth and the turnover test is about income, so a business can fail one and pass the other. A farm with high land value and modest turnover may rely on the net asset test, while a high-turnover trading business with few assets may satisfy the turnover test but not the net asset test. You need to pass only one.
The test is not a GST threshold and has no link to GST turnover or the GST registration limit. It is used purely in the capital gains tax setting. Keep valuations and working papers showing how you arrived at the figure, as the ATO may ask for them. This is general information only, so confirm your position with the ATO or a registered tax professional.
Worked example
Greg sells his business premises. Just before the sale, the market value of his CGT assets plus those of connected entities, excluding his main residence and super, is $4,200,000. Liabilities relating to those assets are $900,000. His net asset value is $4,200,000 - $900,000 = $3,300,000. He compares this with the current legislated threshold on the ATO website to see if he passes.
Practical tips
- Check the current threshold on the ATO website before calculating, since the figure is set by legislation and can change.
- Include assets of connected entities and affiliates, not only your own.
- Keep valuations and working papers, because market values rather than purchase costs are used.