Edited version of private ruling

Authorisation Number: 1011728643113

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Ruling

Subject: Small business retirement exemption

Question and answer

Are you eligible for the Capital Gains Tax (CGT) retirement exemption under subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are a professional and the sole owner of a business related to your profession.

Your business is known by its business name and you are the sole registered proprietor.

Your business in the last financial year had less than $2,000,000 aggregated turnover.

You purchased a property in early 2000.

The property was purchased because of its prominent location making it ideal to advertise your business. Signage advertising your business was attached to the side and front of the premises.

From the time of acquisition, the property has been used as safe premises to store documents and files related to your business and as an alternative office of your business.

You have owned the property for less than 15 years. You are contemplating selling the property in the current financial year.

At all times, the property has been an active asset of the business.

You have not previously used any part of the CGT retirement exemption limit.

The net value of your CGT assets is under the limit of $6,000,000.

You estimate that your net wealth after deducting liabilities is approximately a certain amount.

Relevant legislative provisions

Income Tax Assessment Act 1997 section152-10

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 subsection 152-305(1)

Income Tax Assessment Act 1997 subsection 152-315(1)

Income Tax Assessment Act 1997 subsection 152-315(2)

Income Tax Assessment Act 1997 section 152-320

Income Tax Assessment Act 1997 subsection 152-340(1)

Income Tax Assessment Act 1997 section 328-110

Reasons for decision

Small business retirement exemption

Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) provides a small business retirement exemption as part of the CGT small business relief provisions. If you qualify for the small business retirement exemption, all or part of a capital gain remaining after other concessions have been applied can be disregarded if certain conditions are satisfied.

Section 152-305 of the ITAA 1997 states that an individual can choose to disregard all or part of a capital gain if you satisfy the basic conditions and, if you are under 55 years of age, you roll-over the amount into a complying superannuation fund or similar type of fund.

You must specify the amount in writing that you wish to disregard and not exceed the CGT retirement exemption limit.

Basic conditions

The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997:

(a) a CGT event happens in relation to a CGT asset of yours in an income year under paragraph 152-10(1)(a) of the ITAA 1997

(b) the event results in a capital gain under paragraph 152-10(1)(b) of the ITAA 1997

(c) at least one of the following applies:

(i) you are a small business entity

(ii) you satisfy the maximum net asset value test,

(iii) you are a partner in a partnership that is a small business entity, and the CGT asset is an asset of the partnership

(iv) the conditions in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year.

(a) the CGT asset satisfies the active asset test under section 152-35 of the ITAA 1997

You have advised that you will be selling your property within the 2010-11 income year. A CGT event will happen when you sell your property.

Small business entity

Section 328-110 of the ITAA 1997 provides that you will be a small business entity if you are an individual, partnership, company or trust that:

· is carrying on a business, and

· has less than $2 million aggregated turnover in the previous year.

Aggregated turnover is your annual turnover plus the annual turnovers of any businesses that are connected with your or that are your affiliates.

In your case, you have advised you carry on a business and that your annual net turnover from this business was less than $2 million. Therefore, you satisfy subparagraph 152-10(1)(c)(i) of the ITAA 1997.

Active asset test

The active asset test under paragraph 152-10(1)(d) of the ITAA 1997 must be satisfied. A CGT asset satisfies the active asset test if the asset is an active asset of yours just before the CGT event and it is an active asset for at least half of the period you own it.

Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset at a given time, if, at that time, you own it and use it in the course of carrying on a business.

You advised that you purchased the property in early 2000 and at all times the property has been used for the purpose of storing business files and for client visits. You have also advised that the property has signage on the side of the building advertising your business. As the building has been used for a business purpose for more than half the period of your ownership, you have satisfied the active asset test.

You have satisfied the basic conditions for relief as set down in section 152-10 of the ITAA 1997. However, you must also satisfy the additional conditions that apply specifically to the retirement exemption as set down in subsection 152-305(1) of the ITAA 1997.

CGT retirement exemption limit

Subsection 152-315(1) of the ITAA 1997 states that if you are a sole trader or a partner in a partnership, you can use the small business retirement exemption to exempt all or part of a capital gain if:

· The amount you are choosing to exempt does not exceed your remaining CGT retirement exemption limit (subsection 152-315(2) of the ITAA 1997). An individual's lifetime CGT retirement exemption limit is $500,000 (section 152-320 of the ITAA 1997). The amount you choose to exempt is called your exempt amount, and

· You contribute the exempt amount into a complying superannuation fund or retirement savings account if you were aged under 55 years just before you chose to use the retirement exemption (paragraph 152-305(1)(b) of the ITAA 1997. If you are aged 55 years or more there is no requirement to roll over any amount.

The CGT exempt amount you choose for the asset must be specified in writing.

Your circumstances

As you are over 55 years of age, you may apply the CGT retirement exemption to exempt the capital gain made on the sale of your business premises. As you have advised that you have not previously applied any CGT exempt amounts towards your lifetime limit, you may choose to apply the small business retirement exemption up to the lifetime limit of $500,000. The amount you choose must be in writing.

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