Q. I read your recent comments on the CGT small business concessions on the sale of a business. We are in the final stages of negotiations and expect to go to contract next month. Our problem is that we probably don’t qualify for the concessions based on the maximum net asset test of $6 million. We’re not over by a lot but I think we are over. How tightly is it tested?

A. This is an area that you need to be careful with and where a lot of SMEs are coming unstuck. The ATO are quite active in checking the maximum net asset test where a business claims the CGT small business concessions. This test is one of the basic conditions for relief under s.152-10 of the Tax Act. It is tested at the time of CGT event, and if you fail this test then you are not eligible for the concessions unless you are a small business entity with turnover less than $2 million per annum in which case you do not need to satisfy the maximum net asset test.

If you are at or near the $6 million threshold then the detail of this becomes extremely important. You should work through with your accountants a detailed calculation on your assets. Keep in mind that you also need to include certain assets of any connected entities or affiliates. These are related entities and your spouse or child under 18. The assets which need to be included are quite specific and need to worked through carefully. If you are tested by the ATO you will need to be able to prove your calculation that you were under the $6 million net asset test.

The fact that this test is applied immediately prior to the CGT event opens up some planning options. There are a number of assets that are not included in the test. Examples include your family home, your superannuation and certain personal use assets. So if you are in excess of the maximum net asset test, but prior to the time of the CGT event you move some of your assets from being ‘tested assets’ into non tested assets then this may bring you under the threshold. Paying down your home mortgage, making a contribution to your superannuation fund, spending some money on your house are examples of this. There are many ways to achieve a reduction in your tested assets.

The key is to know your starting number. Where you have assets such as publicly listed shares and where the value could change from day to day be careful about sudden market movements. In these cases don’t plan down to the last dollar. Allow some buffer level.

If you haven’t signed the contract you still have time on your side. Do the homework, do the planning and you could save yourself a lot of tax.

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