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Edited version of your written advice
Authorisation Number: 1012686796583
Ruling
Subject: Small business retirement exemption
Question 1
Are you eligible to disregard any remaining capital gain made on disposal of the property under the CGT retirement exemption concession for small business?
Answer
No
This ruling applies for the following period:
Income year ended 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
You purchased a property from the crown at auction prior to 20 September 1985. The property was purchased undeveloped but subject to conditions requiring development to be completed within three years.
You purchased the property as joint tenants with your spouse.
On your spouse's death in 20xx, their share of the property transferred to you.
Property was originally purchased for your own business purposes. But upon completion of the development the property was leased to another party as their works depot.
Relevant legislative provisions
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 152-305
Reasons for decision
Small business CGT concession eligibility
Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are:
(a) a CGT event happens in relation to a CGT asset in an income year.
(b) the event would have resulted in the gain
(c) at least one of the following applies:
(i) you are a small business entity for the income year
(ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997
(iii) you are 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 or
(iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.
(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.
Active asset
Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.
Importantly, subsection 152-40(4) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. Accordingly the relevant property cannot be an active asset.
Small business retirement exemption
You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. If you are an individual who chooses the retirement exemption, you do not need to terminate any activity or cease business. This concession allows you to provide for your retirement.
Subsection 152-305(1) of the ITAA 1997 explains that if you are an individual, you can choose to disregard all or part of a capital gain if:
• you satisfy the basic conditions
• you keep a written record of the amount you chose to disregard (the CGT exempt amount), and
• if you are under 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA).
As discussed above the property has been used to derive rental income and accordingly will not be an active asset, therefore you do not satisfy the basic conditions to access the small business concessions.
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