Edited version of private ruling

Authorisation Number: 1011633595253

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Ruling

Subject: Capital gains tax - small business concessions

Questions and Answers

1. Will the entire property be considered to be an active asset under the capital gains tax concessions for small business?

Yes.

Are the basic conditions satisfied for the purposes of applying the small business concessions?

Yes

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The property in question has been owned by you and your spouse as joint tenants for a significant period.

You and your spouse have used the property to run a business as a partnership for more than 15 years. You and your spouse have has also used the property for farming purposes.

The main residence of you and your spouse is located on the property and the dwelling and surrounding land has an area of 2 hectares.

When you dispose of the property you will make a gain on sale.

Your aggregate turnover from the business is less than $2 million.

The net value of assets owned by you, entities connected with you, your affiliates and entities connected with your affiliates is less that $6 million.

You and your spouse plan to transfer the property into a self managed super fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Paragraph 108-5(1)(a)

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-120

Reasons for decision

Small business CGT concessions

There are four capital gains tax (CGT) small business concessions that apply after 11.45am on 21 September 1999 which are:

· the 15-year retirement exemption

· the 50% active asset reduction

· the $500,000 lifetime limit retirement exemption, and

· rollover (replacement of business assets) relief

Before considering any of these concessions, there are certain basic conditions which must be satisfied. Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the basic conditions for relief where a capital gain may be reduced or disregarded. These conditions are as follows:

(a) a CGT event happens in relation to a CGT asset

(b) the event results in a gain

(c) at least one of the following applies

i. the taxpayer is a small business entity for the income year

ii. the maximum net asset value test is satisfied

iii. the taxpayer is a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership

d) the CGT asset satisfies the active asset test.

a) A CGT event happens

When the property is transferred from being in the joint name of you and your spouse to being in the name of your self managed superannuation fund, a change of ownership will occur. A CGT event will happen. This condition is satisfied.

(b) The event results in a gain.

You have stated that a capital gain will result on disposal of the property.

(c) You are a small business entity for the income year or you satisfy the maximum net asst value test

The aggregate turnover of the business is under $2 million (you are a small business entity) and the value of your and your affiliates assets is less than $6 million (you satisfy the maximum net asset value test). This condition is satisfied.

We shall now consider the last test which is the active asset test.

d) The active asset test

This test requires the CGT asset to be an active asset for:

· 7 years, if owned for more than 15 years, or

· half of the ownership period if owned for 15 years or less (section 152-35 of the ITAA 1997).

An active asset may be a tangible asset or an intangible asset.

A tangible or intangible asset is a CGT active asset if it is used or held ready for use in the course of carrying on a business by:

· the taxpayer

· the taxpayer's spouse or child under 18 years

· the taxpayer's affiliate, or

· an entity connected with the taxpayer (paragraph 152-40(1)(a) of the ITAA 1997).

Assets which cannot be active assets

The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997):

· interests in a connected entity (other than those satisfying the 80% test)

· shares in companies and interests in trusts (other than those satisfying the 80% test)

· shares in widely held companies unless they are held by a CGT concession stakeholder of the company

· shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply

· financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options

· an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary.

Private purpose and active asset

As a general rule, a property used to carry on business by a taxpayer, which does not fall within one of the exclusions (listed above) under subsection 152-40(4) of the ITAA 1997 will be an active asset. The definition of 'active asset' does not require exclusive use of the asset for business purposes. The fact that part of the property is used for private purposes, such as for main residence purposes, does not affect the property's standing as an active asset in the hands of the taxpayer. The taxpayer may choose to use the CGT small business concessions and treat the entire property as an active asset.

Your case

You and your spouse purchased a property in joint names and have been using the property to run a business for more than some years. The property has been used for your business as well as for farming purposes. Your main residence is also located on the property.

The property satisfies the requirements of an active asset as you purchased it more than 15 years ago and have used it in the carrying on of a business for more than 7 years. The exclusions in subsection 152-40(4) of the ITAA 1997 do not apply. The fact that your main residence is situated on the property does not affect its status as being an active asset. In conclusion the entire property is considered to be an active asset for the purposes of the CGT small business concessions.

Summary

The entire property (including your main residence) is considered to be an active asset and the basic conditions are satisfied in order to consider the small business CGT concessions.

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