Edited version of your written advice

Authorisation Number: 1012850416365

Date of advice: 29 July 2015

Ruling

Subject: Capital gains tax and small business concessions

Questions and answers:

1. Are you entitled to disregard any capital gain that results from the disposal of your pre-CGT interest in the property?

Yes.

2. Are you entitled to disregard any capital gain that results from the disposal of your post CGT interest in the property?

No.

3. Does the property satisfy the basic conditions for the small business capital gains tax concessions?

Yes.

4. Are you entitled to apply the small business 15 year exemption rule that allows you to disregard in full any capital gain that results from disposal of your post CGT interest?

No.

5. Are you entitled to apply the 50% general discount to any capital gain arising from the sale of your post CGT interests in the property?

Yes.

6. Are you entitled to apply the small business 50% active asset reduction to capital gain that results from the disposal of your post CGT interest?

Yes.

7. Are you entitled to apply the small business retirement exemption to the capital gain?

Yes.

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts

You purchased a 50% share of a farm pre-CGT.

You inherited the remaining 50% share of the property post-CGT.

From the time of that the property was purchased it has been used for the purpose of running a primary production business.

You intend to dispose of the property.

After the property is disposed of you will continue to operate your primary production business on an adjacent property that you jointly own with your spouse.

Your primary production business is a small business entity with an annual turnover of less than $2 million.

You satisfy the maximum net asset value test.

You are over 55 years of age.

You have never disregarded a capital gain under the retirement exemption.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 subsection 328-125(1)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 subsection 152-40(4)

Reasons for decision

Capital gains tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss as a result of a CGT event happening to a CGT asset in which you have an ownership interest.

Land is a CGT asset as defined under section 108-5 of the ITAA 1997, and the disposal of a CGT asset triggers a CGT event under section 104-10 of the ITAA 1997. The most common event is CGT event A1 which occurs when you dispose of a CGT asset to someone else. Subsection 104-10(5) of the ITAA 1997 provides that any capital gain or loss is disregarded if you acquire the asset before 20 September 1985.

Pre CGT interest

In your case you purchased a 50% share in your property pre 20 September 1985. As this interest in the property was acquired pre-CGT, any capital gain that results from its disposal is disregarded.

Post CGT interest

In your case you inherited a 50% share in your property post 20 September 1985. As this interest in the property was acquired post CGT, any capital gain or loss that results from its disposal cannot be disregarded.

It is this 50% share that we will now discuss.

Basic conditions for the small business capital gains tax concessions

The active asset reduction and small business retirement exemption are some of the small business CGT concessions. To qualify for the small business CGT concessions you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'.

Basic conditions

The basic conditions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are:

• the $6 million limit on the net value of CGT assets

• the active asset test.

Net value of the CGT assets

You will satisfy the maximum net asset value test if, just before the CGT event that results in the capital gain, the net value of the CGT assets of you and the following entities does not exceed $6 million:

• any entities connected with you

• your affiliates and any entities connected to your affiliates (subject to certain exclusions).

An entity is connected with another entity if either entity controls the other or both entities are controlled by the same third entity under subsection 328-125(1) of the ITAA 1997.

Application to your circumstances

The information provided is that the maximum net value of your assets, and any entities connected with you would be less than $6 million just before the CGT event. Therefore you satisfy the maximum net asset value test.

Active asset test

The active asset test requires the capital gains tax (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).

In your case, as the property that you have a 50% post CGT interest satisfies the conditions under section 152-35 of the ITAA 1997, it is an active asset for the purposes of the small business concessions.

Therefore, you satisfy the basic conditions for the small business capital gains tax concessions.

15 year exemption rule

Subdivision 152-B of the ITAA 1997 provides a small business 15-year exemption as part of the CGT small business relief provisions. If you qualify for the small business 15-year exemption, the capital gain is entirely disregarded and it is unnecessary to apply any other concessions.

Under section 152-110 of the ITAA 1997, you can disregard any capital gain arising from the disposal of your farm, if all of the following conditions are satisfied:

(a) you satisfy the basic conditions for the small business capital gains tax concessions (previously established);

(b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event;

(c) you had a significant individual for a total of at least 15 years (even if it was not the same significant individual during the whole period) of the whole period of ownership of the CGT asset; and

(d)  an individual who was a significant individual of yours just before the CGT event was:

(i)  at least 55 years old at that time and the event happened in connection with their retirement or 

(ii)  permanently incapacitated at that time.

In your case you do not satisfy condition under subsection 152-110(d) of the ITAA 1997. The reason that you do not satisfy this condition is that you do not intend to retire but rather continue your primary production activities on the other property that you jointly own.

Therefore you are not entitled to apply the 15 year exemption rule to any capital gain that results from the disposal of your post CGT interest in this property.

50% discount method

Under Division 115 of the ITAA 1997, a taxpayer is entitled to use the discount method to calculate their capital gain if:

• they are an individual, a trust or a complying superannuation entity

• a CGT event happens to an asset that they own

• the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999

• they acquired the asset at least 12 months before the CGT event, and

• they did not elect to use the indexation method.

In your case you satisfy the conditions provided under Division 115 of the ITAA 1997.

Therefore you are entitled to apply the 50% discount to any capital gain that results from the disposal of your property.

50% active asset reduction

In your case, you have owned the inherited 50% interest of the property for a period of greater than 15 years. This property has been used in the course of carrying on primary production activities from the time it was acquired right up until it was sold. Therefore, as previously established it will satisfy the active asset test.

Therefore, you are entitled apply a further 50% discount to any capital gain that results from its disposal.

Retirement exemption

If you are an individual, you can choose to disregard all or part of a capital gain under the retirement exemption in Subdivision 152-D of the ITAA 1997 if:

• you satisfy the basic conditions

• you keep a written record of the amount you choose to disregard, 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).

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 even though you may have been under 55 years old when you received the capital proceeds.

The amount of the capital gain that you choose to disregard 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.

In your case, you satisfy the basic conditions provided under Subdivision 152-D of the ITAA 1997. You have not previously disregarded any capital gain under the retirement exemption.

Therefore, you satisfy the conditions for the retirement exemption and as you are over 55 years of age are not required to make a contribution to your super fund or RSA.

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