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Additional Tests for Shares in a Company or Units in a Unit Trust

This article explains the four additional tests for shares in a company or units in a unit trust.

Particularly, the relevance of the tests, what the four additional tests are, and details of the additional modified Active Asset Test, the additional “carrying on a business” test, the additional modified CGT Small Business Entity Test or the modified Maximum Net Asset Value Test, and the additional CGT concession stakeholder test.

Relevance

The four additional tests are some of the basic requirements that must be satisfied by an entity to gain access to the Small Business CGT Concessions when the CGT asset is a share in a company or a unit in a unit trust.

If the four additional tests apply but are not satisfied, then the Small Business CGT Concessions should not be available.

The additional tests were brought in as an integrity measure.

They were intended to ensure that the Small Business CGT Concessions are only available for CGT assets that are either used or held ready for use in the course of carrying on a small business or are an interest in an entity that carries on a small business.

The four additional tests

The four additional tests are:

  1. The modified Active Asset Test;

  2. The “carrying on a business” test;

  3. Either the modified CGT Small Business Entity Test or the modified Maximum Net Asset Value Test; and

  4. The CGT concession stakeholder test.

For the purpose of these tests, where the CGT asset is a share in a company or a unit in a unit trust, we will refer to the company or unit trust as the “object entity”.  If the object entity holds any direct or indirect interests in other companies or unit trusts, then we’ll refer to those other companies or unit trusts as “later entities”.

1 – Additional modified Active Asset Test

The modified Active Asset Test requires that the CGT asset would still satisfy the Active Asset Test if two assumptions were made.  They are:

  1. Financial instruments and cash inherently connected with a relevant business are not taken into account for the benefit of the Active Asset Test if they were acquired for a purpose that included assisting the CGT asset to satisfy the Active Asset Test; and

  2. If the object entity holds any direct or indirect interests in later entities, then those interests themselves are not taken into account for the purpose of the Active Asset Test.  Instead, a proportion of each later entity’s underlying assets are taken to be assets held by the object entity directly.  And that proportion equals the object entity’s small business participation percentage in the later entity.

However, the underlying assets of a later entity can only be taken to be active assets (and therefore benefit the modified Active Asset Test) where, in broad terms, all of the following three requirements are satisfied:

  1. The later entity’s underlying asset would otherwise qualify as an active asset of the later entity;

  2. The taxpayer would either have a small business participation percentage in the later entity of at least 20% or be a CGT concession stakeholder in the later entity, which broadly requires the taxpayer to be an individual with a 20% interest or the spouse of such an individual; and

  3. The later entity would either be a CGT Small Business Entity at the relevant time or would satisfy the Maximum Net Asset Value Test at the relevant time if the only CGT assets or annual turnovers considered where those of the later entity, the object entity, the object entity’s affiliates and each entity controlled by the object entity assuming the control test percentage were 20% instead of 40%.

2 – Additional “carrying on a business” test

The additional “carrying on a business” test is the shortest and simplest of the four additional tests.

In broad terms, under this additional test, if the taxpayer does not otherwise satisfy the Maximum Net Asset Value Test the taxpayer would be required to be carrying on a business just before the CGT event.  It’s that simple.

3 – Additional modified CGT Small Business Entity Test or the modified Maximum Net Asset Value Test

In broad terms, under this test, the object entity would be required to satisfy either the CGT Small Business Entity Test or the Maximum Net Asset Value Test at the relevant time if three assumptions were made.

The three assumptions are:

  1. The only CGT assets or annual turnovers considered were those of the object entity, each affiliate of the object entity and each entity controlled by the object entity based on the concept of control used when identifying connected entities;

  2. When identifying controlled entities using the control percentage test, the control percentage required were reduced from 40% to 20%; and

  3. Any determination previously made by the Commissioner which determined that one entity does not control another entity were taken not to be in force.

4 – Additional CGT concession stakeholder test

In broad terms, under this test, just before the CGT event either:

  1. The taxpayer must be a CGT concession stakeholder in the object entity; or

  2. CGT concession stakeholders in the object entity must together have a small business participation percentage in the taxpayer of at least 90%.

Disclaimer – The above is intended as commentary and general information only.  It should not be relied upon as taxation advice.  Formal taxation advice should be sought for particular transactions or on matters of interest arising from the above.

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NEWS ARTICLES IN RELATION TO THE ADDITIONAL TESTS FOR SHARES IN A COMPANY OR INTERESTS IN A TRUST