Edited version of your written advice

Authorisation Number: 1051394274171

Date of advice: 4 July 2018

Ruling

Subject: CGT – SBC – 15-year exemption

Question 1

Are you entitled to apply the 15-year exemption in section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain made from the sales of the ‘A’ properties?

Answer

Yes.

Question 2

Is the Estate entitled to apply the small business concessions in Division 152 of the ITAA 1997 in the same way that you could have immediately before the time of your passing in relation to the ‘B’ properties?

Answer

Yes, provided the ownership interest is disposed of within 2 years of the date of your passing (or a longer time as allowed by the Commissioner).

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

You were under 55 years old at the time of your passing.

You operated boarding houses in partnership with another.

You received more than 40% of the net income of the partnership.

The fee paid by the boarders to the operator was a licence fee and not rent.

The aggregated gross income for the entities connected or affiliated with you for the years ended 20XX and 20XX was less than $2 million.

You owned each of the ‘A’ properties for more than 15 years and each has been used in your business for more than 7.5 years.

You held your ownership interests in the ‘B’ properties for more than 15 years and each has been used in your business for more than 7.5 years.

After your passing, the properties formed a part of your estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-115

Income Tax Assessment Act 1997 section 328-125

Reasons for decision

Question 1

Summary

You have met the conditions is Subdivision 152-A of the ITAA 1997 and were permanently incapacitated at the time of the CGT event. You owned the properties for more than 15 years and they were active assets for more than 7.5 years in entities that you were connected with. As such, the capital gain that you made on the sale of each of the properties can be disregarded under section 152-105 of the ITAA 1997.

Detailed reasoning

Section 152-105 of the ITAA 1997 provides that if you are an individual, you can disregard any capital gain arising from a CGT event if certain conditions are met. The conditions are:

● you satisfy the basic conditions in Subdivision 152-A of the ITAA 1997

● you continuously owned the asset for a 15 year period ending just before the CGT event and

● you are permanently incapacitated at the time of the event.

The basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied if:

● a CGT event happens to an asset of yours in an income year

● the event would have resulted in a gain

● an entity that is connected to you is a small business for the income year

● you do not carry on a business (except as a partner in a partnership and the asset is not a partnership asset) and

● the asset satisfies the active asset test.

Section 328-125 of the ITAA 1997 provides that an entity is connected with another if either entity controls the other in a way described by the section.

Subparagraph 328-125(2)(a)(ii) of the ITAA 1997 provides that an entity is connected with a partnership, if they own or have a right to acquire the ownership of, interests in the partnership that carry between them the right to receive at least 40% of the net income of the partnership.

Paragraph 328-125(2)(b) of the ITAA 1997 provides that an entity will control a company if they own, or have the right to acquire, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage that is at least 40% of the voting power in the company.

Section 328-110 of the ITAA 1997 provides that you are a small business entity for an income year if:

● you carry on a business and

● you carried on a business in a previous and/or the current income year and your aggregated turnover was less than $2 million.

Section 328-115 of the ITAA 1997 provides the meaning of aggregated turnover is the total of:

● your annual turnover for the income year and

● the annual turnover for the income year of any entity that you are connected with at any time during the income year and

● the annual turnover for the income year of any entity that is an affiliate of yours at any time during the income year.

Section 152-35 of the ITAA 1997 provides the active asset test. The test if the assets are owned longer than 15 years is that they must have been active assets for at least 7 and a half years for the period commencing when the ownership interest is acquired and ending at the time of the CGT event.

Section 152-40 of the ITAA 1997 provides for the meaning of an active asset. An asset may be an active asset at a time if you own the asset and it is used or held ready for use in the course of carrying on a business that is carried on by an entity connected with you. However, subsection 152-40(e) of the ITAA 1997 provides that an asset is not considered active if its main use was to derive rent, unless such use was only temporary.

Application to the circumstances

The ‘A’ properties are active assets as they have been used in the business and their main use was not to derive rent. Each of the properties was held for a period of longer than 15 years and was used in either the business for at least 7.5 years as an active asset.

At the time of the CGT event concerning the properties, you were permanently incapacitated.

You have met the conditions of section 152-105 of the ITAA 1997 and are eligible to disregard the capital gain made on the sale of each of the properties.

Question 2

Detailed reasoning

Section 152-80 of the ITAA 1997 provides for the circumstance where a CGT event happens within 2 years of an individual’s death. The section applies if:

● the CGT asset forms part of the estate of a deceased individual

● the asset devolves to the individual’s legal personal representative

● the deceased individual would have been able to disregard or reduce the gain under Division 152 of the ITAA 1997 and

● A CGT event happens within 2 years of the date of the deceased’s death.

Subsection 152-80(2) of the ITAA 1997 provides that the legal personal representative of the deceased may reduce or disregard the capital gain in the same way as the deceased individual would have been entitled to under section 152-105 of the ITAA 1997, if subsection (d) only required that they were permanently incapacitated.

Application to the circumstances

You would have met all of the basic conditions in Subdivision 152-A of the ITAA 1997 at a time immediately before your passing. You would also have been entitled to reduce or disregard a capital gain under Division 152 of the ITAA 1997 at a time immediately before your passing. You owned your interest in the ‘B’ properties for a period longer than 15 years and they were active assets for at least 7.5 years of that time in a business. Your ownership interest in the ‘B’ properties forms part of your estate.

Provided the Estate disposes of your ownership interest in the ‘B’ properties within 2 years of the date of your passing (or a longer time as allowed by the Commissioner), the Estate will be entitled to apply section 152-80 of the ITAA 1997.

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