Edited version of private advice

Authorisation Number: 1051576055972

Date of advice: 10 September 2019

Ruling

Subject: 15 year small business concession, not connected with retirement

Question

Are you eligible to apply the 15 year exemption in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) upon the sale of your property?

Answer

No

This ruling applies for the following period:

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

After 20 September 1985, you and other entities bought a property as tenants in common in equal share. You held an interest in the property. You have held this interest for more than 15 years.

The property has a terrace with a shop on the ground level and a dwelling unit above the shop both under the same title. You occupied the upstairs residential dwelling.

You operated a retail business in partnership from the property from the date of purchase for over 15 years, at which point the business ceased and you retired in 20XX. The property was then used as a rental property until you disposed of your interest disposal several years later (almost ten years after the business ceased).

You were over 55 years of age at the time the business ceased.

You satisfy the maximum net asset value test.

You provided relevant details and documentation in relation to the property and business activities (including tax returns).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Subsection 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 152-105

Reasons for decision

Subdivision 152-B of the ITAA 1997 provides a small business 15-year exemption as part of the capital gain tax (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.

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'. The 15-year exemption also has further requirements that you must satisfy for the concession to apply. This is provided for under section 152-105 of the ITAA 1997 which states that you can disregard the capital gain from the disposal of your property, being CGT event A1 happening to the asset, if you:

(a)   satisfy the basic conditions in subdivision 152-A of the ITAA 1997 for the small business CGT concessions.

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

(c)   you are:

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

              (ii)          permanently incapacitated at the time.

Condition (a)

The basic conditions for the small business capital gains tax concessions in subdivision 152-A of the ITAA 1997 (as relevant to this case) are:

·        the maximum net asset value test

·        the active asset test

Maximum net asset value test

It is accepted that you satisfy maximum net asset value test.

Active asset test

The active asset test is satisfied 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 test period detailed below, 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 7.5 years during the test period.

The test period:

·        begins when you acquired the asset, and

·        ends at the earlier of

˗   the CGT event, and

˗   when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

The asset does not need to be an active asset just before the CGT event.

The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997.

The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997.

In your case, you have held your interest in the property since its purchase and the business ceased in 20XX. Because you have held the asset for over 15 years and the asset was an active asset of your business for over 7.5 years during the test period, it satisfies the active asset test. Although the property has also been used to derive rent, it would be considered an active asset due to the proportionate periods of usage.

Because you satisfy both the maximum net asset value test and the active asset test, the basic conditions for the small business concessions are satisfied.

Condition (b)

The conditions specific to the 15-year exemption, condition (b) is satisfied because you have owned the asset for over 15 years.

Condition (c)

Condition (c) of the 15 year exemption applies if when the CGT event happened:

·        you were permanently incapacitated, or

·        you were 55 years or older, and the event happened 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. There needs to be at least a significant reduction in the number of hours that you work or a significant change in the nature of your present activities to be regarded as a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with a taxpayer's retirement', nor does it give any indication of the degree of retirement required in order to take advantage of this concession. The words 'in connection with' can also apply where the CGT event occurs sometime after retirement. This type of case would depend on its own particular facts, and would need to be considered on a case-by-case basis. Our website ato.gov.au provides the following example:

A small business operator retires and his children take over the running of the business. Within six months, they sell some business assets and make a capital gain.

Several reasons may have prompted the sale of the assets. If there is no relevant connection with the small business operator's business, the requirement would not be satisfied. However, if it can be shown that the reason for the disposal of the assets is connected to retirement and the later sale is integral to the small business operator's retirement plan, the sale may be accepted as happening in connection with retirement.

In your case, you advise that you ceased your business and retired over the age of 55 in 20XX. You retained your interest in the property and used it to generate rental income until you sold it several years later. Although retirement can occur sometime before the CGT event, there would still need to be a connection between your retirement and the sale of the property. You retired several years before the disposal of your interest in the property. As you retained your interest in the property to provide rental income after your retirement, it is not considered that there is a connection between your retirement from the business and the disposal of your interest in the property approximately ten years later.

As you have not satisfied this condition you are not entitled to the CGT small business 15 year exemption.

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