Chartered Accountant Timothy Quinn leads Tax & Accounting at Lawpath. 16+ years in tax advisory, specialising in startup growth and expansion. Passionate about supporting entrepreneurial clients with early-stage investment incentives, restructuring, international exit strategy planning, and more.
When it comes to understanding the tax implications of your business assets, things can get confusing quickly. You’re not alone in feeling overwhelmed and wondering how to optimise your tax benefits while remaining compliant on all fronts.
Today, we’ll talk about active assets, which represent both tangible and intangible assets that your business owns. These play a crucial role in capital gains tax (CGT) concessions and may help you reduce your tax burden.
Let’s explore what active assets are, how they can benefit your business, and how to make the most of the tax advantages they offer.
Table of Contents
What are active assets?
A simple active asset definition is something that your business owns and uses or holds ready to use during your operations. These assets can be tangible or intangible:
- Tangible active assets include things like business premises, equipment, and vehicles.
- Intangible active assets can be items like goodwill, patents, trademarks, and copyrights.
The Australian Taxation Office (ATO) recognises active assets as a key component in determining eligibility for small business CGT concessions. These concessions can significantly reduce the amount of tax you pay when you sell a business asset.
Active asset test: how to qualify
To benefit from the CGT concessions related to active assets, your asset needs to pass the ATO’s active asset test.
- Time requirement: The asset must have been active for a specific period.
- If you’ve owned the business for 15 years or less, the asset must have been active for at least half of that time.
- If you’ve owned the business for more than 15 years, the asset should have been active for at least 7.5 years.
- Usage: The asset must be used or held ready for use in the course of your business. This can include use by you, your spouse, your child under 18, a connected entity, or an affiliate.
- Continuous use: The asset doesn’t need to be used continuously throughout the required period. It just needs to meet the overall time requirement.
Active asset test example
Let’s say you’ve owned a coffee shop for 10 years and want to sell the espresso machine you bought when you first opened.
If you’ve been using the machine in your business for at least 5 years (half of the 10-year ownership period), it would pass the active asset test.
Active assets vs. passive assets
Your business might own certain tangible or intangible assets that it doesn’t use regularly — these are passive assets. These are usually investment assets.
There is a big difference in how these are treated for tax purposes. Here is a table for a quick comparison.
| Active Assets | Passive Assets |
| Used in day-to-day business operations | Held for investment purposes |
| Examples: business premises, equipment | Examples: rental properties, listed shares |
| May qualify for CGT active asset concessions | Generally don’t qualify for small business CGT concessions |
| Directly contribute to business income | Generate income without active involvement |
It’s important to note that assets whose main use is to derive rent, interest, royalties, or capital gains are generally not considered active assets. However, there are exceptions.
For instance, if you only get rental income from an asset temporarily or if the value of an intangible asset appreciates significantly due to your improvements, these might still qualify as active assets.
Benefits of active assets for small businesses
Your small Australian business can derive significant benefits from your active assets. This is particularly true when it comes to tax benefits and strategic planning.
Capital Gains Tax (CGT) concessions
When selling an active asset, your business may be eligible for valuable CGT concessions.
50% active asset reduction
By using this concession, you may be able to reduce your capital gains by 50% on active assets owned for at least 12 months. For example:
- Capital gain: $100,000
- After 50% active asset reduction: $50,000
15-year exemption
If you’ve owned an active business asset for 15 continuous years and are retiring (aged 55+) or permanently incapacitated, you can sell the asset completely CGT-free.
For instance:
- Sarah, 57, sells her graphic design studio for $800,000
- Original purchase price: $200,000
- Potential capital gain: $600,000
- After the 15-year exemption: $0 CGT payable
Retirement exemption
This provides a lifetime CGT exemption of up to $500,000 for retirees. You don’t need to be over 55 to qualify. However, if you’re younger than 55, you must pay the exempt amount into your superannuation fund and the sale must be in connection with your retirement.
Rollover relief
This concession allows you to defer your capital gain for two years. In the meantime, you can reinvest in replacement active assets or restructure your business.
Strategic tax planning opportunities
You can capitalise on your active assets by strategically planning when to sell them in order to reap the most benefits from existing tax concessions. Here are some things you’ll need to consider.
- Timing of asset sales: You can plan when to sell assets to maximise tax benefits. This may depend on your income that year or the length of time you’ve possessed the asset.
- Asset utilisation: Ensuring that assets meet the active asset test can help qualify for concessions.
- Combining concessions: You can potentially reduce capital gains to zero by applying multiple concessions in a specific order.
Increased business value
Active assets aren’t just about saving money on taxes. They can directly contribute to business operations and can enhance overall business value.
For example, when you actively use certain business assets, they can increase your productivity and profitability. Plus, intangible assets like trademarks can substantially increase in value as your business grows.
Flexibility in asset classification
You can move assets around when performing strategic business and financial planning. The ATO’s rules provide some flexibility in how assets are classified.
For example, you can temporarily change how assets are used in order for them to retain active status. You may also transfer assets to affiliated entities or connected businesses and still qualify them as active.
Another important consideration is holding assets “ready for use”. While you may not be using them daily, these assets are still considered active by the ATO for tax purposes.
Common misconceptions about active assets
There are several things that business owners often get wrong about active assets. Here are some common misconceptions that can jeopardise your tax planning.
1. Automatic active status
Misconception: “All business assets are automatically active assets.”
Not all assets used in a business qualify as active assets. They must meet specific ATO criteria.
To be considered an active asset, the asset must be used or held ready for use in the course of carrying on a business. Additionally, the asset must have been active for at least half the ownership period (up to a maximum of 7.5 years).
2. Perpetual active status
Misconception: “Once an asset is active, it’s always active.”
Assets can lose their active status if you stop using them or if their main use changes. For example, if a business uses a warehouse for two years and then rents it out for four years, it would no longer be considered an active asset.
3. Status of rental properties
Misconception. “Rental properties are always passive assets.”
While rental properties are typically considered passive assets, there are exceptions. If you use a property in a rental business where significant services are provided to tenants, it might be regarded as an active asset.
However, these exceptions are rare, and most rental properties will still be classified as passive assets.
4. CGT qualification
Misconception: “Active assets always qualify for CGT concessions.”
While being an active asset is a crucial step towards qualifying for CGT concessions, it’s not the only requirement. Your business must also meet other criteria, such as the $6 million net asset value test or $2 million aggregated turnover test.
Additionally, there are specific rules for different types of assets and business structures that you’ll need to consider when determining eligibility for CGT concessions.
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FAQ
Can rental properties be considered active assets?
Generally, rental properties are considered passive assets and don’t qualify as active assets. However, if the property is part of a larger business operation where you provide significant services beyond just renting out space, it might be considered active.
How do I determine if an asset is active?
To determine if an asset is active, ask yourself: Is it used or held ready for use in your business operations? Has it been used for at least half the time you’ve owned it (or 7.5 years if owned for more than 15 years)?
If you can answer yes to these questions, it’s likely an active asset. When in doubt, consult the ATO guidelines or speak with a tax professional.
Do active assets always qualify for CGT concessions?
While being an active asset is a crucial step towards qualifying for CGT concessions, it’s not the only requirement. Your business must also meet other criteria, such as the $6 million net asset value test or $2 million aggregated turnover test. Additionally, there are specific rules for different types of assets and business structures.
Understanding and managing active assets
Understanding active assets is a key part of smart financial management for Australian small business owners. By recognising which of your assets qualify as active, you can potentially access valuable tax concessions and make more informed decisions about your business’s future.
Remember, while this guide provides a solid foundation, tax laws can be complex and subject to change. To ensure compliance while maximising your tax benefits, get in touch with Lawpath. Our professional team is here to help with tailored advice.
