Small Business CGT Concessions Division 152 ITAA 1997

The Four Concessions

Division 152 contains four separate concessions, applied in a set order and each with its own conditions on top of the basic eligibility requirements.

15-year exemption (Subdivision 152-B) — The most complete relief. The entire capital gain is disregarded where the asset has been continuously owned for at least 15 years and, for an individual, the taxpayer is 55 or over and the CGT event happens in connection with retirement, or is permanently incapacitated. For a company or trust, a significant individual must have been present for a total of at least 15 years and satisfy the age and retirement or incapacity condition. Where this exemption applies, none of the others are needed.

50% active asset reduction (Subdivision 152-C) — Reduces the remaining capital gain by 50%, applied after the general CGT discount. For an individual holding an asset for more than 12 months, the combined effect of the general discount and this reduction is a 75% reduction in the gain. It applies automatically unless the taxpayer chooses otherwise, and choosing out is sometimes advantageous where the retirement exemption or rollover would be more efficiently applied to a larger gain.

Retirement exemption (Subdivision 152-D) — Allows a capital gain to be disregarded up to a lifetime limit of $500,000 per individual. Where the taxpayer is under 55 at the time the choice is made, the exempt amount must be contributed to superannuation. Where the entity is a company or trust, the payment must be made to the CGT concession stakeholders within the required period.

Small business rollover (Subdivision 152-E) — Defers the gain for up to two years, or longer where a replacement active asset is acquired or capital improvements are made within the replacement asset period. Failure to acquire a replacement asset in time crystallises the deferred gain in the later year, which can be a worse outcome than not electing the rollover at all.

The Basic Conditions

Before any concession applies, four basic conditions in Subdivision 152-A must be met.

1. A CGT Event Happened

A CGT event must have occurred in relation to a CGT asset in the relevant income year.

2. The Gain Would Otherwise Be Assessable

The event must have resulted in a capital gain apart from Division 152.

3. Small Business Entity or Net Asset Value Test

The taxpayer must satisfy at least one of the following:

• Be a small business entity — carrying on business with aggregated turnover of less than $2 million
• Satisfy the maximum net asset value test — net value of CGT assets no more than $6 million
• Be a partner in a partnership that is a small business entity, where the asset is a partnership asset
• Satisfy the passively-held asset rules, where the asset is used in a business carried on by an affiliate or connected entity

Note the turnover threshold for Division 152 purposes is $2 million, not the $10 million threshold used for other small business tax concessions. This trips people up regularly.

4. The Asset Is an Active Asset

The asset must satisfy the active asset test.

The Maximum Net Asset Value Test — Where Valuation Bites

The $6 million test is the condition most often decided by a valuation, and the most often got wrong.

What Is Included

The test measures the net value of the CGT assets of:

• The taxpayer
• Any entities connected with the taxpayer
• Any affiliates of the taxpayer, and entities connected with those affiliates

Net value means the market value of the assets less the liabilities related to those assets, plus provisions for annual leave, long service leave, unearned income and tax liabilities.

The aggregation rules are where the test is most commonly failed unexpectedly. A spouse’s separate business, a family trust holding an investment property, a self-managed super fund in some circumstances, a company in which the taxpayer holds a controlling interest — each may need to be included depending on the control and affiliate relationships. The 40% control threshold for connected entities and the “acts in concert” test for affiliates both require careful application to the actual facts, not assumptions about how the family group is structured.

What Is Excluded

Certain assets are disregarded, and the exclusions matter as much as the inclusions:

• Assets used solely for the personal use and enjoyment of the taxpayer or their affiliate
• A dwelling used as the taxpayer’s main residence, subject to an adjustment where it has been used to produce income
• Superannuation and approved deposit fund interests
• Rights to asset-test-exempt income streams and certain insurance policies

For an individual, the main residence exclusion is frequently the difference between passing and failing. It requires the residence to be properly identified as a main residence and any income-producing use to be correctly apportioned — a common source of error where a room has been used as a home office or part of the property has been rented.

Timing

The test is applied just before the CGT event, not at the end of the income year and not at the date the contract settles. For a share sale, this means just before the contract date. Assets acquired or disposed of after that moment are irrelevant; assets held at that moment count even if they are sold the following week.

Why Contemporaneous Valuation Matters

There is no requirement in the legislation for a formal valuation, and the ATO accepts that a taxpayer may make a reasonable estimate. But if the position is reviewed — and taxpayers sitting close to $6 million are more likely to be — the burden falls on the taxpayer to substantiate the figures.

A valuation prepared at the time by an independent specialist, on documented assumptions, is a materially stronger position than a retrospective reconstruction prepared under audit pressure years later. Where the margin is thin, the cost of the valuation is trivial against the tax at stake.

The Active Asset Test

An asset is an active asset if it is used, or held ready for use, in the course of carrying on a business by the taxpayer, an affiliate, or a connected entity.

The Holding Period Requirement

The asset must have been an active asset for:

• At least 7.5 years, where it was owned for more than 15 years, or
• At least half the ownership period, where it was owned for 15 years or less

The active periods need not be continuous.

Excluded Assets

Certain assets can never be active assets, most significantly:

• Assets whose main use is to derive rent, unless the rent is from an affiliate or connected entity using the asset in its business
• Financial instruments, including shares in companies and interests in trusts, other than where the 80% test below is satisfied
• Assets whose main use is to derive interest, an annuity, royalties or foreign exchange gains

The rent exclusion is the most litigated aspect of Division 152. Whether a property is used to derive rent or to carry on a business of providing accommodation or services turns on the character and level of the services provided — caravan parks, storage facilities, serviced offices, holiday accommodation and boarding houses all sit in genuinely contested territory. Where the property has mixed use, the “main use” question requires apportionment on a supportable basis, and floor area, revenue attribution and time-based measures can produce different answers.

Shares and Trust Interests — The 80% Test

Where the CGT asset is a share in a company or an interest in a trust, the asset is only an active asset if, at the relevant time, at least 80% of the market value of all the assets of that entity is attributable to active assets, cash and financial instruments inherently connected with the business.

This requires a full valuation and classification of the entity’s balance sheet, including goodwill and identifiable intangibles that do not appear on the balance sheet at all. Goodwill is an active asset and is often the largest single item — a company that appears to fail the 80% test on book values may pass comfortably once goodwill is valued. Conversely, accumulated cash beyond working capital needs, surplus property, and passive investments held inside the trading entity all count against the test.

The test must be satisfied throughout the relevant periods, not just at the CGT event, which means historical balance dates may need to be assessed as well.

Additional Conditions for Shares and Trust Interests

Where the asset is a share or trust interest, further conditions apply beyond the basic conditions:

CGT concession stakeholder — The taxpayer must be a CGT concession stakeholder in the company or trust, or CGT concession stakeholders must together have a small business participation percentage of at least 90% in the taxpayer.

Significant individual — A significant individual is an individual with a small business participation percentage of at least 20%, which may be made up of direct and indirect interests. A CGT concession stakeholder is a significant individual or their spouse where the spouse has a participation percentage above zero.

For discretionary trusts, participation percentage is determined by reference to distributions of income and capital in the relevant year, which means historical distribution patterns directly affect eligibility — and in a year with no distributions, the test may fail entirely. This is a structural issue that needs to be identified well before a sale, not at completion.

Interaction With Superannuation

Amounts disregarded under the 15-year exemption and the retirement exemption can be contributed to superannuation under the CGT cap, which sits outside the concessional and non-concessional contribution caps. The cap is a lifetime limit, indexed annually.

The contribution must be made within the required timeframe and the correct election form lodged with the fund at or before the time of contribution. Missing the election is a procedural failure that cannot generally be corrected and results in the contribution counting against the standard caps — potentially triggering excess contributions tax on an amount that was intended to be sheltered.

Common Failure Points

• Failing to aggregate a connected entity or affiliate, most often a spouse’s business or a family trust, pushing net asset value over $6 million on review
• Using book values rather than market values in the net asset test, which understates property and omits goodwill
• Omitting goodwill from the 80% test, causing a company that would pass to be assessed as failing
• Testing at the wrong date — year end or settlement rather than just before the CGT event
• Applying the $10 million turnover threshold instead of the $2 million threshold that Division 152 requires
• Assuming a rented property is an active asset where the main use is deriving rent
• No significant individual in the relevant year for a discretionary trust, because of the distribution pattern
• Retrospective valuation prepared under audit, with no contemporaneous support for the assumptions
• Missing the superannuation election or contribution deadline after the concession is claimed

InteleK’s Approach to Division 152 Valuations

Our accredited valuers work alongside your tax adviser to deliver the valuation evidence Division 152 eligibility depends on. Here’s what sets our process apart:

Maximum Net Asset Value Testing — Market valuations of all relevant assets across the taxpayer, connected entities and affiliates, tested at the correct point in time, with the exclusions applied and documented. Where the result sits close to $6 million, we say so plainly and identify which assumptions the conclusion is most sensitive to.

Goodwill and Business Valuation — A supportable market value for the business and its goodwill, which is both the largest omission from book-value net asset calculations and the item most likely to determine the 80% test for a share sale.

80% Active Asset Testing — Full valuation and classification of the entity’s asset base, including unrecognised intangibles, with the classification rationale documented asset by asset and assessed across the relevant periods rather than only at the CGT event.

Active Asset Classification for Property — Where a property’s use is mixed or the rent exclusion is in question, we provide the apportionment analysis on a defensible basis rather than a bare assertion of main use.

Timed to the Transaction — Valuations delivered before the CGT event where we are engaged in time, so eligibility is known before the deal is signed rather than discovered afterwards. Where the event has already happened, we prepare the valuation as at the correct date on contemporaneous evidence.

Documentation Built for Review — Every assumption sourced and every judgement explained, in a report structured to stand up if the ATO examines the position years later. A reasonable estimate is permitted; a substantiated one is what survives review.

Collaboration With Your Tax Adviser — Division 152 eligibility is a legal question that turns on facts, structure and history. We provide the valuation and the classification analysis; your tax adviser applies the tests. Engagements where both work together from the start are the ones that do not need redoing.