Edited version of your written advice

Authorisation Number: 1013047242063

Date of advice: 11 July 2016

Ruling

Subject: Small business 15-year exemption - in connection with your retirement - separate interests in the same CGT asset

Question 1

Can you apply the small business 15-year exemption to the capital gain you will make on the disposal of the 50% interest in the property that you acquired more than 15 years ago?

Answer

Yes.

Question 2

Can you apply the small business 15-year exemption to the capital gain you will make on the disposal of the 50% interest in the property that you acquired less than 15 years ago?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on

1 July 2015

Relevant facts and circumstances

You are over 55 years old.

You acquired the property jointly with your spouse more than 15 years ago

You carried on a business on the property in partnership with your spouse (until they passed away less than 15 years ago) and their estate for more than 15 years from the date of acquisition.

You then carried on a business on the property in partnership with another person.

After that an entity connected with you began operating a business on the property.

You operate a part-time business as a sole trader on a separate property.

You are a small business entity.

You used to work full-time and were heavily involved in the partnership businesses. You currently work fewer hours.

You intend to dispose of the property to another person and will make a capital gain on the disposal.

The disposal of the property is part of your overall retirement plans. Your involvement at the property is currently minimal and will cease altogether once the property is disposed of, further reducing the hours you currently work.

You intend to carry on your part-time business for a few more years and then retire completely.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-7

Income Tax Assessment Act 1997 section 128-50

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 paragraph 152-105(d)

Reasons for decision

Summary

You qualify for the small business 15-year exemption in respect to the 50% interest in the property that you acquired more than 15 years ago and can disregard the capital gain you make on the disposal of this interest. However, as you have not owned the other 50% interest in the property for 15 years you cannot apply the small business 15-year exemption to this interest.

Detailed reasoning

Separate interests in the property

You and your late spouse purchased the property as joint tenants. Individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common (section 108-7 of the Income Tax Assessment Act 1997 (ITAA 1997)). You are taken to have acquired your late spouse's interest in the property on the day they died (subsection 128-50(2) of the ITAA 1997).

Consequently, your ownership of the property is made up of two separate interests. The first was acquired more than 15 years ago (1^st interest). The second was acquired less than 15 years ago (2nd interest).

The interests remain separate CGT assets for capital gains tax purposes. Each interest must be looked at separately when considering whether the small business 15-year exemption applies.

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 make 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.

1^st interest

The basic conditions contained in Subdivision 152-A of the ITAA 1997 will be satisfied for this interest because:

• a CGT event will occur when you dispose of this interest in the property

• the event will result in a gain

• you will be a small business entity at the time of the event, and

• you have owned this interest in the property for more than 15 years and it has been used in businesses carried on by you, or entities connected with you, for a total of at least 7½ years of your ownership period.

In addition,

• you will have continuously owned this interest in the property for the 15-year period ending just before the CGT event, and

• you will be at least 55 years old when you dispose of this interest in the property.

In connection with your retirement

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. A CGT event may be 'in connection with your retirement' even if it occurs at some time before or after retirement.

The Explanatory Memorandum (EM) to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession:

1.68 One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement.

The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with your retirement', nor does it give any indication of the degree of retirement required in order to take advantage of this concession. It could be argued that the phrase 'in connection with your retirement' means that the capital gain arising from the disposal of active assets is to be used to provide funds for a person's retirement rather than to precipitate retirement at the time of the CGT event. The words used in the EM support this interpretation.

The guide to the Capital gains tax concessions for small business 2016 also supports this view. It makes it clear that it is not necessary for there to be a permanent and everlasting retirement from the workforce. However, there needs to be at least a significant reduction in the number of hours worked, or a significant change in the nature of the activities, to be regarded as 'in connection with your retirement' for the purposes of paragraph 152-105(d) of the ITAA 1997.

The EM and the guide provide that the retirement does not need to occur immediately following the event, however whether a particular case satisfies the conditions depends very much on the facts of the case. In your case, you have already reduced your working hours significantly; however, your working hours will be reduced further on the disposal of the property and you will be retiring completely in the next few years.

It is considered that there will be a clear link between the disposal of the property and your retirement. It is considered that the disposal of the property is integral to your retirement plans. Accordingly, the subsequent CGT event when you dispose of the property will be considered to happen in connection with your retirement in accordance with paragraph 152-110(1)(d) of the ITAA 1997.

As such, you qualify for the small business 15-year exemption in section 152-105 of the ITAA 1997 in relation to your 1^st interest in the property. You can disregard the capital gain you make on the disposal of this interest.

2^nd interest

The basic conditions contained in Subdivision 152-A of the ITAA 1997 will be satisfied for this interest because:

• a CGT event will occur when you dispose of this interest in the property

• the event will result in a gain

• you will be a small business entity at the time of the event, and

• you have owned this interest in the property for 15 years or less and the property has been used in businesses carried on by you, or by entities connected with you, for a total of at least half of your ownership period.

However, as you have not continuously owned this 2^nd interest in the property for the 15-year period ending just before the CGT event you do not satisfy the conditions for the small business 15-year exemption. As such, you cannot apply the small business 15-year exemption to disregard the capital gain you make on the disposal of this interest in the property.

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