CGT Small Business Entity Test
This article explains the CGT Small Business Entity Test.
Particularly, the relevance of the test, an overview of the test, and a couple of the key concepts that are relevant to the test being aggregated turnover and annual turnover.
There are many basic requirements which need to be satisfied by an entity to gain access to the Small Business CGT Concessions.
And of those basic requirements, either the CGT Small Business Entity Test or the Maximum Net Asset Value Test would need to be satisfied.
If neither of those tests are satisfied, then the Small Business CGT Concessions should not be available.
In order to satisfy the CGT Small Business Entity Test, the entity has to carry on business in the relevant tax year and one of the three turnover tests needs to be satisfied. They are:
The entity has an aggregated turnover for the previous tax year of less than $2,000,000;
The entity is “likely” to have aggregated turnover for the relevant tax year of less than $2,000,000, with this generally being tested as at the first day of the relevant tax year. However, this turnover test cannot be satisfied if the entity had an actual aggregated turnover in each of the previous two tax years of $2,000,000 or more; or
The entity has an actual aggregated turnover for the relevant tax year of less than $2,000,000, with this being tested as at the end of the relevant tax year.
In the context of partnerships, partners are not CGT Small Business Entities in their capacity as partners, but the partnership itself could be. Now that doesn’t mean that partners can’t be CGT Small Business Entities – they can be, but this would have to be because of other non-partnership business activities.
An entity’s aggregated turnover is the sum of the annual turnovers (discussed below) of the entity and the entity’s connected entities and affiliates.
When calculating aggregated turnover, there are a couple of exclusions that should be considered. They are:
You can exclude amounts derived by the entity or the entity’s connected entities and affiliates where those amounts are derived from each other. An example of this would be where connected entity A makes sales to connected entity B – those sales can be excluded; and
You can exclude amounts derived by connected entities and affiliates at times when they were not connected or affiliated. And an example of this would be where entity C makes sales to third parties before entity C became a connected entity – those sales can similarly be excluded.
An entity’s annual turnover is the total ordinary income that the entity derives in the ordinary course of carrying on a business.
So it doesn’t include statutory income like capital gains or dividend income, and it doesn’t include non-business ordinary income such as an individual’s employment income.
There are also further exclusions for Goods & Services Tax and for sales of retail fuel.
Where ordinary income is derived from an associate (which is a much broader class of entities than connected entities and affiliates), the amount of ordinary income that is taken into consideration is the arm’s length amount instead of the actual amount if they are different.
And lastly, where a business is carried on for only part of the tax year, the annual turnover is worked out using a reasonable estimate of what the annual turnover would have been if the entity carried on the business for the whole tax year.
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 CGT SMALL BUSINESS ENTITY TEST
Connected entities - The indirect control test and the public entity exception - Update
Connected entities - The indirect control test and the public entity exception
Aggregated turnover and differing income year periods - Finalised Determination
Aggregated turnover and differing income year periods
Board of Taxation Report re the Small Business tax concessions