Small businesses may be eligible for various concessional treatments for transactions that involve capital gains tax (CGT), which can reduce, defer or even eliminate CGT payable (see previous article “The small business concessions”). But the Tax Office says that some common mistakes keep occurring on a regular basis in applying the tests for eligibility to the CGT concessions.
Maximum net asset value
The most common error seems to surround the maximum net asset value test. One of a number of alternative tests must be satisfied in order to gain access to the concessions, and this test is one of them. Just prior to the relevant CGT event, the net value of CGT assets that the business (and related parties) owns cannot be more than $6 million at the time the CGT event occurs.
The Tax Office said the net value of the CGT assets of an entity is the total market value of its assets, less any liabilities relating to those assets. The maximum net asset value test allows the net asset value of an entity to be reduced by liabilities such as provisions for annual leave, long service leave, unearned income and tax liabilities.
The maximum net asset total includes the value of assets that are owned by the business itself, but also those owned by any connected entities and affiliates. The Tax Office said that failing to identify connected entities and affiliates is one of the common mistakes, but also:
- the valuation of assets at historical cost rather than market value
- not including in the calculation the CGT asset sold.
The Tax Office added that where market value is required, accepted valuation principles should be applied. For guidance, see the Tax Office’s web page “Market valuation for tax purposes”.
Use contract date, not settlement date
The Tax Office had also found that business owners had incorrectly used the settlement date instead of the contract date when recording details of the CGT event. This can end up resulting in:
- the active asset test not being met due to it not being “active” for the required period, and
- incorrectly applying the 15 year exemption when the asset had not been held for that time.
The Tax Office advised (and the law states) that a CGT event is generally deemed to occur at the time a contract is entered into, not at the settlement date. For disposals of assets, the time of the CGT event is usually when the disposal contract is signed.
For practical purposes, where contract and settlement dates cross over financial years, the capital gain or loss should be declared in the financial year in which the contract was signed.