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ATO Interpretative Decision

ATO ID 2004/240

Income Tax

CGT small business concessions: CGT event J2 and J3 - capital proceeds for retirement exemption
FOI status: may be released

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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

If CGT events J2 or J3 in sections 104-185 and 104-190 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to an asset previously chosen as a replacement asset under the small business roll-over, what are the 'capital proceeds' for the purposes of choosing the retirement exemption in Subdivision 152-D of the ITAA 1997 for the capital gain made from CGT events J2 or J3?

Decision

If CGT events J2 or J3 in sections 104-185 and 104-190 of the ITAA 1997 happen to an asset previously chosen as a replacement asset under the small business roll-over, the 'capital proceeds' for the purposes of choosing the retirement exemption in Subdivision 152-D are the capital proceeds from the original CGT event.

Facts

The taxpayer, a grazier, sold their farm in the 2000 income year and made a capital gain. They received actual capital proceeds from the sale. They taxpayer purchased another farm as a replacement asset and chose the small business roll-over to defer the capital gain.

In the 2004 income year, when the taxpayer was 56 years of age, they sold the new farm, thereby crystallising the deferred capital gain. The taxpayer now wants to choose the retirement exemption.

Reasons for Decision

The small business roll-over in Subdivision 152-E of the ITAA 1997 provides a deferral of a capital gain if a replacement asset is acquired, and certain other conditions are satisfied.

If CGT event J2 in section 104-185 of the ITAA 1997 (disposal or other change of status of a replacement asset) or CGT event J3 in section 104-190 of the ITAA 1997 (change of circumstances where a share or interest is a replacement asset) happens, the deferred capital gain is effectively crystallised. A capital gain is made equal to the amount of the capital gain that was previously disregarded.

Under subsection 152-10(4) of the ITAA 1997 the 15 year exemption (Subdivision 152-B) and the 50% active asset reduction (Subdivision 152-C) do not apply to capital gains made from CGT events J2 or J3. However, such gains may be eligible for the retirement exemption or a further roll-over.

With respect to the requirement that there must be actual 'capital proceeds' received in order to choose the retirement exemption, it is considered the crystallised capital gain made from CGT event J2 or J3 has the characteristics of the deferred capital gain including its actual capital proceeds (if any). That is, for the purposes of the retirement exemption, the capital proceeds from CGT event J2 or J3 are the capital proceeds from the original CGT event. These capital proceeds are received for the purposes of Subdivision 152-D at the time CGT event J2 or J3 happens.

If the original CGT event did not involve actual capital proceeds, such that the retirement exemption would not have been available at that time, there would be no actual capital proceeds relevant to the later CGT event J2 or J3, and accordingly, the retirement exemption would not be available for the crystallised capital gain in this situation.

Note: If a replacement asset is disposed of, a separate capital gain may also be made (from CGT event A1, section 104-10 of the ITAA 1997) in addition to the crystallised capital gain. This separate capital gain may be eligible for all the small business concessions if the conditions are satisfied.

Date of decision:  16 February 2004

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 104-10
   section 104-185
   section 104-190
   Subdivision 152-B
   Subdivision 152-C
   Subdivision 152-D
   subsection 152-10(4)

Related ATO Interpretative Decisions
ATO ID 2002/269

Keywords
Capital gains
Capital gains tax
CGT events J1-J3 - rollovers
CGT small business relief
Small business 15 year exemption
Small business 50% reduction
Small business retirement exemption

Business Line:  Losses and Capital Gains Tax Centre of Expertise

Date of publication:  19 March 2004

ISSN: 1445-2782

history
  Date: Version:
You are here 16 February 2004 Original statement
  14 May 2010 Archived

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