Did you know that if you own an asset that someone else uses in their small business, you might still qualify for valuable Capital Gains Tax (CGT) concessions? This often-overlooked tax planning opportunity could potentially eliminate or significantly reduce CGT when selling assets used in a family member's business.

Understanding Small Business CGT Concessions

The Australian Taxation Office (ATO) offers four powerful small business CGT concessions that can significantly reduce tax liabilities when selling business assets:

• Small Business 15-Year Exemption: Completely disregard capital gains if you've owned the asset for at least 15 continuous years, are aged 55 or over, and are retiring or permanently incapacitated

• Small Business 50% Active Asset Reduction: Reduce your capital gain by 50% (in addition to the general 50% CGT discount if applicable)

• Small Business Retirement Exemption: Exempt capital gains up to a lifetime limit of $500,000, with different requirements depending on your age

• Small Business Rollover: Defer capital gains if you acquire replacement business assets within a specified timeframe

For the 2024-25 financial year, to qualify for these concessions, your business must either have an aggregated annual turnover below $2 million or satisfy the maximum net asset value test (less than $6 million in total net assets).

Passively-Held Assets and CGT Concessions

Generally, owners of passively-held assets (such as commercial properties, factories, or warehouses) aren't considered to be carrying on a business themselves. However, an important exception exists when a taxpayer owns a passively-held asset that is used in a small business carried on by an affiliate or a connected entity.

This means your personal asset could qualify for valuable CGT concessions if:

• The asset is used in a business operated by your spouse

• The asset is used in a business run by your child (under 18)

• The asset is utilized by a family company or trust in which you have relevant interests

For example, if you own a commercial property that houses your spouse's accounting practice, photography studio, or retail business, you may qualify for significant tax concessions when selling that property.

How the "Affiliate" Rules Work

To access these concessions, the business operator must be your "affiliate" or a "connected entity" as defined in tax legislation. An affiliate is generally someone who acts according to your directions or wishes in relation to business affairs.

Importantly, neither a spouse nor a child is automatically your affiliate. The relationship must be established based on the actual business arrangements. The ATO states: "You must consider whether they are acting according to your directions or wishes".

When determining eligibility for passively-held assets, if treating your spouse or child as your affiliate results in the business entity being taken as an affiliate of the entity that owns the asset, then special rules apply for the purposes of the small business CGT concessions.

Common Scenarios Where These Concessions Apply

Property Owned By You, Used in Your Spouse's Business

If you own a small commercial property that your spouse uses to operate their business, when you sell that property, you may be eligible to apply small business CGT concessions to reduce or eliminate the capital gain.

Assets Used By a Family Company or Trust

The concessions can also apply to assets you own that are used by a family company or trust in which you have a relevant interest. This arrangement works in "reverse" too – assets owned by a family company or trust that are used in your business may also qualify for these concessions.

Testamentary Trust Situations

When a business owner passes away, assets that continue to be used in a business operated by a testamentary trust may still qualify for CGT concessions. Alternatively, it may be easier to access the concessions if the executor or beneficiary sells the relevant business assets within two years of the deceased's death.

Key Requirements for Qualifying Under These Rules

To access these concessions for passively-held assets, several critical tests must be satisfied:

Active Asset Test

The asset must qualify as an "active asset," meaning it must be used, or held ready for use, in the course of carrying on a business. The ATO defines an active asset as "one that the taxpayer owns and uses, or holds ready for use, in the course of carrying on a business".

A recent Administrative Appeals Tribunal case clarified that the concept of "use" refers only to physical use, not merely holding a property for capital appreciation purposes.

Basic Condition Requirements

You must also satisfy the basic condition requirements for small business CGT concessions, including either:

• Being a small business entity (aggregated turnover under $2 million), or

• Satisfying the maximum net asset value test (net assets under $6 million)

Tax Planning Considerations

These rules apply whether or not you lease the asset to the person or entity carrying on the business. This provides flexibility in structuring family business arrangements.

However, determining whether persons or entities qualify as "affiliates" or "connected entities" can be complex and depends on the specific circumstances of all parties involved.

Example Scenario

Sarah owns a small commercial property in Sydney that her husband Michael uses to operate his accounting practice. They have no formal lease agreement, but his business pays all outgoings related to the property. After owning the property for 20 years, Sarah decides to sell it, realizing a capital gain of $450,000.

If Michael qualifies as Sarah's affiliate, and the property is an active asset used in his small business (which meets the $2 million turnover test), Sarah may be able to access the small business 15-year exemption. This could potentially allow her to completely disregard the $450,000 capital gain, resulting in zero CGT liability.

Common Pitfalls to Avoid

Misinterpreting Affiliate Status

A common mistake is assuming that family members are automatically affiliates. Remember that spouse and child relationships must still satisfy the "acting according to your directions or wishes" test for business affairs8.

Failing the Active Asset Test

Assets must be genuinely used in the business. As mentioned earlier, "use" refers to physical use, not merely holding an asset for capital appreciation purposes.

Frequently Asked Questions

Does it matter if I charge rent to my spouse's business for using my asset?

No, the concessions can apply whether or not you lease the asset to the person or entity carrying on the business.

Can I claim these concessions if my child uses my asset in their business?

Yes, if your child is under 18 and uses your asset in their business, and they qualify as your affiliate, the asset may be eligible for small business CGT concessions when sold.

Can I apply more than one CGT concession to the same asset sale?

Yes, you can potentially apply multiple concessions to the same capital gain, sometimes reducing it to zero. The concessions must be applied in a specific order1.

Taking Advantage of These Valuable Tax Concessions

The small business CGT concessions represent some of the most generous tax breaks available to Australian business owners and their families. By understanding how assets you own but that are used in a spouse's or family member's business can qualify for these concessions, you position yourself to significantly reduce tax liabilities when selling these assets.

If you own assets used in a family member's business, or you're considering starting a small business that will utilize assets owned by someone else, speak to a tax professional in Sydney who specializes in small business CGT planning. With expert guidance, you can structure arrangements to optimize tax outcomes while ensuring compliance with all ATO requirements.

Don't miss the opportunity to potentially save thousands in capital gains tax through these powerful but often overlooked concessions.