When it’s time to upgrade your main residence and start renting out your old main residence, you can set your cost base in one of two ways:

1. Calculate the purchase price, any holding costs and capital improvements whilst the property was your main residence; or
   
2. Get a valuation at the time the property is first used to produce income.

Option 2 is usually the best scenario however only works if the property was your main residence first.

Option 2 does not work if the property is an investment property, then a main residence and then a rental property again.

Please contact us if you would like to discuss further or have any questions.

By Bjorn Kirberg

In Part 1 and Part 2 we covered the basic conditions of the CGT Small Business Concessions.

Part 3 will cover the common scenario where the asset being sold is a share in a company or an interest in a trust.  This is especially helpful in Queensland to avoid stamp duty.

If the asset being sold is a share in a company or an interest in a trust, it must meet additional conditions outlined below.  These rules were expanded in 2018 to ensure that the entity itself being sold could not be worth more than $6 million, which significantly narrowed the number of taxpayers eligible.

(1) Just before the CGT event, either:

(i) The taxpayer must be a CGT concession stakeholder in the company or trust; or

(ii) CGT concession stakeholders in the company or trust had a total small business participation percentage in the taxpayer claiming the concession of at least 90%.

(2) Unless the taxpayer satisfies the maximum net asset value test, it must be carrying on a business just prior to the CGT event.

(3) The company or trust must either be a CGT small business entity (below $2 million aggregated turnover) for the income year or satisfy the maximum net asset value test (net assets below $6 million).

(4) The share in the company or interest in the trust must satisfy a modified active asset test (MAAT).  Work out the total market value of both:

(i) the assets of the company or trust and

(ii) the assets of any later (interposed) entity in which the taxpayer has a small business participation percentage, multiplied by that percentage.

To meet the MAAT, at least 80% (the 80% test) of the above assets must be made up of:

active assets and

cash or financial instruments inherently connected with the business carried on by the company/trust or a later entity

Definitions

A CGT Concession stakeholder of a company or trust is a significant individual in the company or trust, or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust.

Small business participation percentage is the sum of the direct and indirect small business participation interests.

A significant individual has a small business participation percentage in the company or trust of at least 20%.

These rules are very complex and this is just an overview. Please contact us if you would like to discuss further or have any questions

Despite owning multiple properties, you cannot simply choose which property is your main residence to suit the best capital gains tax outcome at the time of sale.  In order to claim the Main Residence Exemption from CGT at the time of sale there is a need to establish the property as your main residence. 

Generally speaking, your main residence is considered to be the address at which you most frequently reside and is that recorded:

• on the Electoral Role;
• on your driver’s licence;
• with the ATO; and
• with your bank.

The existence of an electricity account and internet account in your name for the address and even photos of you residing at the property can also help establish a property as your main residence.

Meeting the Basic Conditions

By Bjorn Kirberg

To qualify for the Small Business CGT Concession:

you must be considered a “Small Business”; OR

the maximum net assets of your business must be below $6million; AND

the asset being sold must be an “active asset”.

So… Is your entity a Small Business?

You are a Small Business if you are a sole trader, partnership, company or trust that:

operates a business for all or part of the income year; and

has a turnover less than $2 million

Turnover includes the turnover of connected entities and affiliates of the business and their connected entities.

Turnover can be worked out based on the previous year’s turnover, an estimate of your current year turnover or your actual current year turnover.  There are some exceptions and special rules if you are not using your previous year’s turnover.

Are the maximum net assets of the business below $6 million?

Net value of CGT assets:

owned by the taxpayer (and entities connected with the taxpayer); and

used or held ready to use in a business carried on by the taxpayer (or an entity connected with the taxpayer); and

owned by the taxpayer’s affiliates (and entities connected with their affiliates)

must not exceed $6 million (the “maximum net asset value” test) just before the sale of the active asset which created the CGT event.

Is the asset being sold an Active Asset?

If the entity is either a small business OR the entity satisfies the $6 million net asset value test, the asset being sold must also be an Active Asset for the business to qualify for a Small Business CGT Concession.

Active Assets are those owned by the taxpayer and used or held ready for use in carrying on a business.  The asset is not considered an Active Asset if it is held for a passive investment, rental property, financial instrument, loan etc. Obviously there is a large degree of complexity in the above rules.  Please contact us if you would like to discuss further or have any questions.