An active asset is an asset that is owned by a taxpayer and used in a business by the taxpayer, an affiliate of the taxpayer, or by another entity that is connected with the taxpayer. An active asset can be a tangible asset (such as commercial property), or an intangible asset (such as goodwill).
Small businesses (those with a turnover of less than $2m pa) who sell active assets may be entitled to the small business capital gains tax (CGT) concessions. These small business CGT concessions will reduce the taxable capital gain and in some cases result in no tax being paid at all on the gain.
The active asset test requires the CGT asset to be an active asset for:
• Half the period of ownership if owned for 15 years or less.
• 7.5 years, if owned for more than 15 years.
A tangible or intangible asset is a CGT active asset if it’s used or held ready for use in the course of carrying on a business by the taxpayer, spouse or child under 18 years, an affiliate, or a connected entity.
This means if an asset has been an active asset for at least 7.5 years it will be an active asset indefinitely, regardless of when the asset is sold and what other uses the asset has been used for subsequently.
So, for example, if a residential house has been used as an office for a business for 7.5 years, and then rented as a residential property for 20 years, the asset will always be an active asset. As such, when the asset is sold 20 years later, the small business capital gains tax concessions will still apply and will reduce the tax liability payable.