Edited version of private advice

Authorisation Number: 1051545893628

Date of advice: 15 July 2019

Ruling

Subject: CGT - small business concessions - 15 year, active asset, retirement exemption

Question 1

Do you meet the basic conditions to apply the small business capital gains tax (CGT) concessions to the capital gain from the disposal of property 1A and property 2A?

Answer

Yes

Question 2

Do you meet the basic conditions to apply the small business CGT concessions to the capital gain from the disposal of property 1B and property 2B?

Answer

No

Question 3

Do you satisfy the conditions to apply the small business 15 year exemption to the capital gain from the disposal of property 1A?

Answer

Yes

Question 4

Do you satisfy the conditions to apply the small business 15 year exemption to the capital gain from the disposal of property 2A?

Answer

No

Question 5

Do you satisfy the conditions to apply the small business 50% active asset reduction and retirement exemption to the capital gain from the disposal of property 2A?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You and your late spouse conducted a business in partnership.

You acquired a 50% interest in a building (property 1A) after 19 September 1985, with your late spouse acquiring the remaining 50% interest (property 1B).

You acquired a 50% interest in the adjoining building (property 2A), with your late spouse acquiring the remaining 50% interest (property 2B) on XX August 20XX.

Your business continued to operate out of the properties after acquisition.

On XX May 20XX your spouse died and their interests in property 1 and property 2 passed to you (property 1B and property 2B).

The business was sold on XX April 20XX.

The properties were leased to the new business owners at the time of sale.

Both properties were sold on XX August 20XX, with settlement occurring on XX October 20XX.

You meet the $6 million maximum net asset value test

You are over 55 years of age.

You retired and the properties were sold in connection with your retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 section 152-10,

Income Tax Assessment Act 1997 subsection 152-35(1),

Income Tax Assessment Act 1997 section 152-40,

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

Income Tax Assessment Act 1997 paragraph 152-40(4A)(b),

Income Tax Assessment Act 1997 section 152-105, and

Income Tax Assessment Act 1997 section 152-205.

Reasons for decision

Summary

You meet the basic conditions to apply the small business CGT concessions for your ownership interests in property 1A and property 2A. Property 1B and property 2B do not satisfy the active asset test and therefore do not meet the basic conditions to apply the small business CGT concessions.

Property 1A meets the conditions to apply the 15 year exemption, however property 2A does not, as you have not owned it for 15 years or more.

Property 2A meets the conditions to apply the 50% active asset reduction and the retirement exemption as long as the required records are maintained.

Detailed reasoning

Differing ownership interests in the properties

Each property will be considered to consist of two separate CGT assets.

Property 1 will consist of your existing ownership interest (property 1A) and the other being the ownership interest acquired from your late spouse (property1B). You are taken to have acquired your spouse's ownership interest in the property on the date of their death.

Property 2 will also consist of these two separate ownership interests, property 2A (existing ownership interest) and property 2B (acquired from your late spouse upon their death).

Basic conditions

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 capital gains tax (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.

To be eligible to apply the small business CGT concessions you must satisfy all four of the basic conditions above.

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if:

·  you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period of ownership, or

·  you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 and a half years.

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. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use. Notably, personal use of the asset by you or your affiliate is ignored in determining its main use.

In your case, you have had a CGT event (CGT event A1) upon the disposal of the properties, the event resulted in a capital gain and you satisfy the $6 million maximum net asset value test.

In relation to the active asset, we need to look at each property interest to determine if that interest satisfies the test.

Property 1A

You have owned property 1Afor more than 15 years and it was used in your business for more than seven and a half years, therefore property 1A will satisfy the active asset test and meet the basic conditions.

Property 2A

You have owned property 2A for less than 15 years and it was used in your business more than half of your period of ownership. Property 2A will satisfy the active asset test and meet the basic conditions.

Property 1B and property 2B

You have held property 1B and property 2B since XX May 20XX. As ownership of property 1B and property 2B is less than 15 years and they were active assets of yours for less than half of the period of ownership, they do not satisfy the active asset test and will not meet the basic conditions to apply the small business CGT concessions.

15 year exemption

The small business 15-year exemption takes priority over the other small business concessions and the CGT discount. If the small business 15-year exemption applies, you entirely disregard the capital gain so there is no need to apply any further concessions. Further, you do not reduce the capital gain by any capital losses before you apply the 15-year exemption concession.

Section 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if all of the following conditions are satisfied:

(a)  you satisfy the basic conditions

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

(c)  you are either:

                              i.        55 or over at the time of the CGT event and the event happens in connection with your retirement; or

                             ii.        permanently incapacitated at the time of the CGT event.

Property 1A

You satisfy the basic conditions and have continuously owned property 1A for more than 15 years.

You are over 55 years of age and the property has been disposed of in connection with your retirement. You have satisfied the conditions to apply the 15 year exemption and disregard any capital gain made on the disposal of property 1A.

Property 2A

You satisfy the basic conditions, however you have not owned property 2A for more than 15 continuous years, therefore you do not meet the conditions to apply the 15 year exemption to disregard any capital gain made on the disposal of property 2A.

Active asset reduction

If you do not qualify for the small business 15 year exemption, the small business 50% active asset reduction may apply to reduce the capital gain.

Unlike the other small business concessions, the active asset reduction applies automatically if the basic conditions are satisfied, unless you choose for it not to apply (section 152-205 of the ITAA 1997).

Property 2A

In your case, you do not qualify to apply the small business 15 year exemption upon the disposal of property 2A, however as you satisfy the basic conditions you may apply the 50% active asset reduction.

Small business retirement exemption

Subdivision 152-D of the ITAA 1997 contains the 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.

As 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 person contribution equal to the exempt amount to a complying superannuation fund or retirement savings account.

There is no requirement to make this contribution if the individual was 55 years old or older.

The amount of capital gain you choose to disregard (that is the CGT exempt amount) 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.

Property 2A

You satisfy the basic conditions and as long as you maintain written record of the amount you choose to disregard, you will be eligible to apply the small business retirement exemption upon the disposal of property 2A.

As you are over 55 years old there is no requirement to make a contribution to a complying superannuation fund or retirement savings account.

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