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Ruling

Subject: CGT Small business concessions

Questions:

1. Do you qualify for the 15 year exemption?

Answer: No.

2. Do you qualify for the 50% CGT discount?

Answer: Yes.

3. Do you qualify for the additional small business 50% active asset reduction?

Answer: Yes.

4. Do you qualify for the CGT small business retirement exemption up to a lifetime limit of $500,000?

Answer: Yes.

This ruling applies for the following period

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commenced on

1 July 2012

Relevant facts

You and your siblings purchased a primary production property in more than 25 years ago and ran a primary production business on the property, and additional leased land, under a partnership structure for more than 7.5 years.

Since the partnership business ceased, the property has been leased to a local farmer.

You and one of your siblings are aged under 55 years of age, and the others are over 55 years of age.

You and your siblings are now considering selling the property.

You satisfy the maximum net asset test.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 104-10

Income Tax Assessment Act 1997 - Division 115

Income Tax Assessment Act 1997 - Division 152

Income Tax Assessment Act 1997 - Subdivision 152-A

Income Tax Assessment Act 1997 - Subdivision 152-B

Income Tax Assessment Act 1997 - Subdivision 152-C

Income Tax Assessment Act 1997 - Subdivision 152-D

Reasons for decision

To qualify for the small business CGT concessions, you must first satisfy the 'basic conditions' that are common to all the concessions.

STEP 1 - You must first satisfy one of the following:

In your case, neither you nor the partnership is carrying on a business in the current financial year. The property has been a passively held asset since 2000, being leased to a local farmer, who is not your affiliate or an entity connected with you. However, you do satisfy the maximum net asset test.

STEP 2 - The asset in question must satisfy the active asset test.

If you have owned the asset for more than 15 years, the active asset test is satisfied where the asset was an active asset of yours for a total of least 7.5 years during the test period.

In your case, you and your siblings purchased a primary production property over 25 years ago and operated a primary production business on the property under a partnership structure for more than 7.5 years.

As the property has been owned for more than 15 years and was used in the partnership's primary production business activity for more than 7.5 years, the property satisfies the active asset test.

Therefore, you satisfy the 'basic conditions' required to qualify for the small business CGT concessions.

CGT concessions

Where the 'basic conditions' are met, individuals (including partners in partnerships) may be able to reduce any capital gain in the following sequence. First you offset capital losses against capital gains. Then you apply:

The small business 15-year exemption takes priority over the other small business concessions and the CGT discount. If the small business 15-year exemption applies, you entirely disregard the capital gain so there is no need to apply any further concessions.

15 year exemption

You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you satisfy the basic conditions and:

In your case, you have held the property continuously for at least 15 years. However, you are not permanently incapacitated or 55 years old or older. Therefore, you do not currently qualify for the small business 15 year exemption.

If the 15-year exemption doesn't apply, you apply the CGT discount (if applicable) to the capital gain before applying the remaining small business concessions.

If you satisfy the conditions for more than one of the remaining small business concessions, you may apply each of those concessions to different parts of the capital gain.

Discount capital gain

CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997, relating to the disposal of a CGT asset, will happen when you dispose of the property. You will make a capital gain if the capital proceeds from the disposal are more than the cost base. You will make a capital loss of those capital proceeds are less than the reduced cost. 

You will be eligible for the discount capital gains where:

The discount percentage is 50%.

Where a capital gain meets these requirements, that capital gain is a discount capital gain. Generally, the discount percentage is applied to the discount capital gain, to arrive at your net capital gain.

Based on the facts, you will be eligible for the discount capital gains of 50% if your capital gain is calculated without any reference to indexation of the cost base.

50% active asset reduction

Unlike the other small business concessions, the small business 50% active asset reduction applies automatically if the basic conditions are satisfied, unless you choose for it not to apply. There are no further requirements.

In your case, you satisfy the basic conditions and the small business 50% active asset reduction will apply.

Retirement exemption

You may choose to apply the small business retirement exemption after the CGT discount has been applied and the small business 50% active asset reduction, that is, to the remaining 25% of the capital gain.

If you are an individual, you can choose to disregard all or part of a capital gain if:

If you are 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA

For an individual choosing the retirement exemption, there is no requirement to terminate any activity or cease their business.

The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) must not exceed your 'CGT retirement exemption limit'.

An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. This includes amounts disregarded under former (repealed) retirement exemption provisions.

As discussed above, you satisfy the basic conditions and you are under 55 years of age. Therefore, providing you have no previous CGT exempt amounts disregarded under the retirement exemption, you will be able to choose to disregard up to $500,000 under the retirement exemption where you make a personal contribution equal to the exempt amount to a complying superannuation fund or RSA.

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