While in general, companies must pay tax in Australia on capital gains earned on assets, a 50% active asset reduction may be available. Generally speaking, the 50% active asset reduction applies after other CGT concessions (e.g. CGT discount).
In this guide, you’ll learn what makes something an active asset and what that means for the capital gains tax (CGT) due when you sell it.
What is an active asset?
Generally speaking, an active asset is a CGT asset which has been actively used in your business for at least:
half the time since you obtained the asset (if you’ve owned it for 15 years or less); or
7.5 years (if you’ve owned it for more than 15 years).
Knowing which of your assets can be classed as active may reduce the capital gains tax you owe.
Your assets aren’t considered active if they are primarily used to get passive income, like interest, dividends or rent.
Consider the difference between these scenarios:
You rent out an asset for less than half the time you own it — active
You buy a warehouse and use it as a storage and distribution centre for your online store. After five years, you lease a much larger space and rent out the warehouse before selling it four years later. In this case, the warehouse would be considered an active asset — you’ve used it to run your business for over half the time you owned it.
You rent out an asset for more than half the time you own it — not active
If you use your warehouse in your business for only two years and then rent it out for four years, it’s not an active asset. You weren’t using it to run your business for over half of the time you owned it.
You only use the asset to earn rent — not active
If you buy the warehouse and only rent it out, it won’t be considered an active asset.
Examples of common active assets
Examples of common active assets include equipment, machinery, vehicles, business premises and certain intangible assets that are inherently connected with your business.
Understanding which of your assets will be deemed active is only important if it appreciates. If you sell an active asset for more than you paid for it, you’ve made capital gains but may be able to reduce your CGT.
Equipment
Equipment you use in your business can be considered active assets, from manufacturing or construction machinery to computers, desks and POS systems. However, in most cases, these assets will depreciate rather than appreciate. When you sell them, you won’t make capital gains and won’t pay CGT anyway.
Commercial land and property
Commercial land and property are different to equipment, as in most cases, these assets will appreciate, and you’ll be liable for CGT when you sell.
If, however, the land or property is being used to run your business, it might be considered an active asset and may qualify for a small business CGT concession – to reduce or defer paying CGT on the money you make on the sale.
If your business is in farming, all your land and buildings will be considered active assets, even where land or buildings, like grazing fields and shearing sheds, are only used at certain times of the year. This land is held “ready for use” and so passes the test.
Holding land that you intend to develop, or are currently developing for your business doesn’t meet the test, as the land isn’t held “ready for use”.
Renting out or leasing commercial property
Renting out commercial property is generally not considered using it to run your business.
Trademarks and patents
Trademarks and patents are considered intangible assets. They can qualify as active assets if they’re inherently connected to your business and you’ve substantially grown their value as a result of improvement or development you’ve undertaken.
Say you launch three day spas in your city, register the name across Australia and trademark the logo. The day spas are so successful that after two years, you license the name and logo to an investor, who uses it to open day spas across the country.
After two more years, you sell the trademark as an active asset. As it’s been used in your business at least 50% of the time you have owned the logo and name, and has increased in value due to your business operations, it meets the requirements of the active asset test.
What are small business CGT concessions?
Small business CGT concessions are tax relief for your small business — they can reduce or eliminate capital gains tax (CGT) when you sell a business asset. Generally, any capital gains need to be included in your net income, which increases the tax you owe.
There are four main small business CGT concessions that can reduce or defer the amount owed when you make capital gains upon selling an asset:
15-year exemption: If you’ve owned the business asset for at least 15 years and you’re aged 55 or older and retiring, or permanently incapacitated, you won’t pay any CGT on the sale.
Active asset reduction: If the asset can be considered an active asset (actively used in your business), you can reduce the capital gain by 50%.
Retirement exemption: If you're selling assets because you're retiring, you can disregard capital gains up to a lifetime limit of $500,000. If you are under 55, the amount must be paid into a complying superannuation fund or retirement savings account.
Rollover relief: You can defer all or part of a capital gain for two years if you sell an active asset and buy a replacement active asset or make a capital improvement to an existing active asset.
Each of these scenarios has a different concession attached to it. If you’re a small business selling an active asset, you can reduce your CGT owed by half using the active asset reduction. If you intend to buy another active asset, the rollover relief allows you to defer the gain, minimising your CGT owed and potentially saving on taxes overall.
If you’ve owned the asset for at least 15 years and then sell it while meeting the age and retirement conditions, you won’t pay any CGT under the 15-year exemption. Similarly, if you’re over 55 and sell the asset because you're retiring, you may use the retirement exemption (subject to the lifetime limit).
These concessions are designed to support small business owners by providing significant tax relief under specific conditions.
What is the active asset test in accounting?
The active asset test in small business accounting determines whether an asset can be considered active and eligible for a small business CGT concession.
How does an asset pass the active asset test?
An asset passes the active asset test when it has:
Not been mostly used to generate rents, royalties or annuities
Been owned for less than 15 years, and actively used in your business for at least half of that time
Been owned for 15+ years, and actively used for at least 7.5 years
If it’s an intangible asset, like a patent or trademark, it’ll also need to have increased in value because of the work you’ve put in. If you’re selling the asset after 15 years of ownership and retiring aged over 55 or permanently incapacitated, then the capital gain may be disregarded.
When does the active asset test begin and end?
The active test begins when you start using your active asset for your business and ends when you sell your active asset, even if you’ve closed or sold the business before this date.
Active asset FAQs
Is cash considered an active asset?
Cash isn’t considered an active asset because it is a financial instrument used mainly to earn interest, annuities, rent and royalties.
What is active asset management?
Active asset management is different from managing your active assets. Active asset management is when you actively buy, sell and upgrade your assets to generate the best value for your company. Managing your active assets is when you buy, sell, maintain and upgrade assets considered ‘active assets’ by the ATO.
What’s the difference between an active and inactive asset?
The difference between an active and an inactive asset comes down to the ATO’s legal definition. An active asset is necessary for the standard operations of your small business. If it meets certain criteria, you may be eligible for concessions on the CGT you pay when you sell it.
Get active, save on CGT
Tax breaks, like the small business CGT concessions, are levers the Australian government can use to support small businesses and bolster the economy. If you’ve been using an asset to run your business, chances are it’ll qualify as an active asset, which means you could pay less capital gains tax. This could be a huge saving, so it’s well worth paying attention to how you use your assets and how long you own them.
While this may seem complex, accounting software like MYOB makes it easy to keep an overarching view of your tax obligations. It helps you measure your business performance, follow accounting best practices, and make better decisions while removing manual work and making reporting as simple as clicking a button. Get started today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.
MYOB is not a registered entity pursuant to the Tax Agent Services Act 2009 (TASA) and therefore cannot provide taxation advice to clients. If you have a query concerning taxation, including filing your BAS return or annual tax statements, then you should consult with your accountant or other registered tax adviser.