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Court Ruling on CGT Concession Affects Small Businesses

A federal court in Australia recently issued a ruling that would affect how small businesses can avail of the new capital gains tax (CGT) concessions. 

The business owner used an adjacent property as a shed to house tools and equipment he uses in his bricklaying business. When the owner sold the property, he claimed CGT concessions saying that the property was used for his business. 


What is this CGT concession? 

In 2018, the Australian government passed a law giving small businesses enterprise (SME) four types of concessions whenever they gain from the sale of an asset that was used in the small business. 

The tax concessions apply to SMEs with an aggregated turnover of less than $2 million and who have net assets of no more than $6 million. The government passed the law on the concessions to encourage more people to go the entrepreneurial route. The government also want to discourage non-SMEs from using the tax breaks by putting in place a stricter test as to who qualifies. 

 The four concessions are:  

  •  15-year exemption 
  • 50% active asset reduction 
  • Retirement exemption
  • Rollover

More detailed information about the CGT concessions and who qualifies are found at the Australian Taxation Office’s website 

Queensland Court Defines “Active Asset” 

The ATO defines “active asset” as property used in carrying out a business or an intangible asset connected with a business. The asset must have been an “active asset” for at least 7.5 years during the test period if you have owned the asset for more than 15 years. If you own the asset for 15 years or less, the asset must have been an “active asset” for at least half of the test period. 

The test period begins at the time you acquired the property and ends at the earlier of the CGT event. The test period can also end at the time the business ceased if the business stopped operated in the 12 months before the CGT event. 

The Queensland case involved a taxpayer who was in the business of building, bricklaying, and paving. The business was a family business run by a trust. The property that was sold was adjacent to the family home. 

The adjacent property was used to house two sheds for the tools and equipment. Oftentimes, preparatory work was done at the adjacent property. Work vehicles and trailers for the business were also parked in the adjacent property. 

The federal court in Queensland ruled that the taxpayer is not qualified for the CGT concession because the property sold did not pass the “active asset” test. 

How the court defined “active asset” may significantly impact SMEs. The following are the court’s most important pronouncements: 

  1. The taxpayer did not identify in specific details how the property was used for the business 
  2. The taxpayer did not identify the size of the property 
  3. The taxpayer did not indicate the portion of the property that was used by sheds and storage areas for the business 
  4. Because the business was construction, bricklaying, and paving, a large extent of the business activities happens on the worksites where the services are provided 
  5. Even if the business owner erected sheds to store tools and equipment on the subject property, storage was not an activity in the ordinary course of business 
  6. Preparatory work that was done at the adjacent property not an activity in the ordinary course of business because preparatory work was only done occasionally  

In sum, the court said there was no “direct connection” between the storage and the preparatory work to the actual business activity. Thus, the subject property was not an “active asset” and the taxpayer was not entitled to the CGT concessions. 

Key Takeaways  

The CGT concessions were passed into law to encourage small business owners by allowing them to pay reduced to zero taxes. There are requisites that must first be satisfied before a taxpayer may be granted the concession. One of these requisites is that the property sold must be an active asset. 

The court ruling instructs taxpayers to provide specific details as to how the subject property was used in connection with the business. Otherwise, if there is no connection between the property and the business, the taxpayer will not be able to avail of the concessions.