TAX TIP #10: CGT SMALL BUSINESS CONCESSIONS | SHARES AND ACTIVE ASSET TEST

Facts

Trust T has wholly owned Company C for 10 years.

Trust T disposes all of its shares and applies the active asset reduction.

Question

How does Trust T prove it passes the active asset test?

Answer

Trust T must prove that the shares pass the 80% test for five (5) out of the 10 years.

Tax Tip

1. It is not sufficient to simply pass the 80% test in the CGT event year (the year the asset is disposed).

2. The active asset test requires that the shares are an active asset for half of the ownership period, in this case being 5 years.

3. Therefore, the 80% test must be passed for at least 5 out of 10 years.

4. To prove this, each of the following (contained within the 80% test) must be stated for each relevant year:

   1. the market values of the active assets;

   2. the market value of any financial instruments that are inherently connected with a business being carried on;

   3. any cash that is inherently connected with such a business; and

   4. the market value of all of the assets of the business.

5. It is reasonable to rely on the values at 30 June for comparison purposes. For example, if at 30 June Year 1, the 80% test is passed and at 30 June Year 2, the 80% test is also passed, it is reasonable to assume the 80% test was passed for the entirety of Year 2. This is in accordance with section 152-40(3A) ITAA 1997 (Cth) which ensures the 80% test does not need to be applied on a day-to-day basis.

6. We recommend preparing a table which sets out the 30 June values for each of the years, in this case being 10 years, and analysing which years satisfy the 80% test.
   

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