At Boutique Advisers we do a lot of work with small business and see the opportunity for small business owners to get some assistance come sale time to make the most out of the hard work that goes into building a business.
Upon sale of a business, the $6 million net asset test, or maximum net asset value test, is an alternative test to the $2 million revenue test that people are generally aware of. There are other tests that can be applied such as the 15-year ownership, however we will cover this is a separate article.
Under this $6 million asset test, the business owner’s net assets are calculated. If their net assets fall under the $6 million threshold, they qualify for Capital Gains Tax (CGT) concessions.
Quite simply if your business has net assets of $5,900,000, you pass the test. But if your business’ net assets equal $6,100,000, you don’t pass the test, and you aren’t eligible for concessions.
All sounds fairly easy but there are some catches.
What does the $6 million net asset test include?
Under the $6 million asset test, the business’ net value of all CGT assets is calculated. This is done right before the CGT takes place, to ensure the figure is as current as possible.
CGT assets can include:
- The business owners’ CGT assets;
- The assets of any businesses connected with the business owner; and
- Any assets that are used by entities connected with you, if they’re used in relation to a business connected with you.
The crucial thing to remember when making these calculations is that they include all associated CGT assets. This isn’t just your business premises, vehicles, tools, and other assets—it can also include things like business shares, or any rented properties. It covers assets used in other businesses owned by yourself, or businesses that you have a direct connection with.
So, there can be quite an expansive list of assets included in the $6 million asset test.
However, it’s a net asset test, so each asset must be considered with any relevant liabilities factored in. So, for example, say you have a fleet of vehicles you purchased with a loan, but you still owe $100,000 on the loan. This $100,000 is a liability, so it wouldn’t count towards the net asset test.
What is excluded in the asset test?
It’s important to remember that not all assets are included within this test. Assets such as a family home or holiday home, cars or boats, and any other personal assets are all excluded from the $6 million net asset test calculation. In addition, superannuation is also excluded from the asset test.
Is cash included in the maximum net asset value test?
While your personal use assets are not included, unfortunately, cash is included in the maximum net asset value test. So, if your business assets total $5,800,000, but you’ve got $300,000 cash in a personal account, this provides a total assessable figure of $6,100,000.
Strategies for passing the $6 million net asset test
When it looks like your assets are likely to exceed the $6 million threshold, there are a number of strategies you can apply.
If you hold a high figure in cash personally then this money can be moved elsewhere prior to when the CGT event occurs. You may choose to spend part of this money, or move it into non-assessable assets, such as superannuation or bringing forward lifestyle purchases prior to retirement such as caravans or boats.
Another way to pass the asset test is to reduce your assets. This can be achieved by selling assets, then moving the money directly into non-income-earning assets. Things like your superannuation, or luxury items.
And finally….
The breadth and depth of the $6 million net asset test can be confusing. But it doesn’t have to be.
The key is calculating all business assets, and all associated and affiliated business assets. It sounds like a big job, but the important thing is to be methodical and to get advice from your Financial Adviser to start planning in advance of any sale.
To get financial advice on your business sale contact the team at Boutique Advisers.