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Edited version of your written advice
Authorisation Number: 1012774607820
Ruling
Subject: CGT - SBC - small business 15-year exemption
Question 1
Is your share of the gain made on the sale of the property included in your assessable income as ordinary income?
Answer
No.
Question 2
Can you apply the small business 15-year exemption to disregard your share of the capital gain made on the disposal of the property?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2015
The scheme commences on
1 July 2014
Relevant facts and circumstances
You acquired a property more than 20 years ago jointly with your spouse.
You improved the property.
You incorporated a company. You and your spouse each hold 50% of the shares and voting rights in the company. The company carried on a business on the property.
The company paid you rent for the right to use the property. You were also paid a salary by the company to run its business.
The company had turnover of less than $2 million in the years ended 30 June 2014 and 2015.
You entered into a contract for the sale of the property in the year ended 30 June 2015. You made a capital gain on the disposal of the property.
The company ceased carrying on a business when the property was sold. You are not involved in any business activities in your personal capacity.
You were at least 55 years old when you entered into the contract to sell the property.
Your employment with the company ceased when the property was sold. You do not have any plans to materially engage in business or employment in the foreseeable future.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 108-55(1)
Income Tax Assessment Act 1997 subsection 108-70(1)
Income Tax Assessment Act 1997 section 118-24
Income Tax Assessment Act 1997 Subdivision 152-A
Income Tax Assessment Act 1997 section 152-10
Income Tax Assessment Act 1997 subsection 152-10(1A)
Income Tax Assessment Act 1997 section 152-105
Reasons for decision
Profits from an isolated transaction
Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium).
Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).
Having regard to your circumstances and the factors outlined in TR 92/3 your share of the gain made on the disposal of the property is not considered to be ordinary income and is therefore not included in your assessable income under section 6-5 of the ITAA 1997. The disposal of the property is considered to be a mere realisation of a capital asset.
Small business 15-year exemption
Section 152-105 of the ITAA 1997 provides a small business 15-year exemption for individuals. Under this section, you can disregard the capital gain made on the disposal of a CGT asset if you:
(a) satisfy the basic conditions for the small business CGT concessions in Subdivision 152-A of the ITAA 1997
(b) continuously owned the CGT asset for the 15-year period ending just before the CGT event, and
(c) are at least 55 years old at the time of the CGT event and the event happens in connection with your retirement, or are permanently incapacitated at that time.
In your case, the basic conditions contained in Subdivision 152-A of the ITAA 1997 are satisfied because:
• a CGT event occurred when you disposed of the property
• the event resulted in a gain
• an entity connected with you (the company) was a small business entity at the time of the event
• you owned the property for more than 15 years and the property was used in the business of the company for a total of at least 7½ years of your ownership period, and
• during the year ended 30 June 2015:
• you have not and will not carry on any business, and
• the company used the property in its business.
In addition,
• you continuously owned the property for the 15-year period ending just before the CGT event
• you were at least 55 years old when you disposed of the property, and
• the disposal happened in connection with your retirement.
You qualify for the small business 15-year exemption in section 152-105 of the ITAA 1997 in relation to the property. You can disregard your share of the capital gain made on its disposal.
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