Edited version of private advice

Authorisation Number: 1052106076444

Date of advice: 20 April 2023

Ruling

Subject: CGT - small business concessions

Question 1

Will the Owners satisfy the basic conditions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for small business relief upon the disposal of the Property?

Answer

Yes.

Question 2

Will the Owners satisfy the requirements in section 152-105 of the ITAA 1997 to apply the 15-year exemption in respect of the sale of the Property?

Answer

Yes.

This ruling applies for the following periods:

Year ending 20XX

Year ending 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Individual 1, Individual 2 and Individual 3 (the Owners) purchased a freehold property (the Property) more than 30 years ago, with Individual 1 and Individual 2 co-owning a 50% interest and Individual 3 owning the remaining 50% interest.

Individual 1 is Individual 2's spouse.

Individual 1 and Individual 3 registered as partners in a partnership more than 20 years ago (the Partnership).

The Partnership used the Property in carrying on its business since its registration.

The Partnership ceased to carry on the business recently.

The Partnership and its connected entities and affiliates had a turnover of less than $X million in the 20XX-XX financial year.

The net value of CGT assets owned by the Owners, their connected entities and affiliates will be less than $X million, at the time of the sale of the Property for the purpose of the maximum net asset value test in section 152-15 of the ITAA 1997.

The Owners intend to sell the Property and apply the CGT 15-year exemption concession to the expected.

The Owners are all over the age of 55 and will retire in connection with the sale of the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-47

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Reasons for decision

Question 1

Summary

The Owners will meet the basic conditions for relief for the sale of the Property. The sale of the Property will be a CGT event, which is expected to result in a gain. The maximum net asset value test is satisfied. The Active asset test is satisfied as the Property has been owned by the Owners for more than 15 years and the Property has been used in a business relevant to each of the Owners for the purpose of the active asset test for more than 7 ½ years during this ownership period.

Detailed reasoning

Basic conditions for relief

The basic conditions for relief under the CGT small business concessions are outlined in Subdivision 152-A of the ITAA 1997.

Subsection 152-10(1) of the ITAA 1997 provides that a capital gain you make may be reduced or disregarded if the following basic conditions are satisfied:

(a)  a CGT event happens in relation to a CGT asset of yours in an income year;

(b)  the event would (apart from this Division) have resulted in a 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;

(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;

(iv)  you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate, or an entity connected with you;

(d)  the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

A CGT event A1 will occur when the Owners sell the Property. The sale of the Property is expected to result in a capital gain. Both paragraph 152-10(1)(a) and (b) of the ITAA 1997 are satisfied.

The Owners will satisfy the net asset value test in the period covered by this private ruling. Therefore, subparagraph 152-10(1)(c)(ii) of the ITAA 1997 is satisfied.

Active Asset

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on (either alone or in partnership) by you, or your affiliate, or another entity that is connected with you.

In this case, Individual 1 and Individual 3 have used the Property to carry on a business as partners in a partnership, their business use is considered for the purpose of the active asset test. However, as Individual 2 is not a partner in the Partnership, we need to consider their affiliation or connection to the business for the purpose of the active asset test.

Affiliates

Subsection 328-130(1) of the ITAA 1997 states that an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.

There is also a note to section 328-130 of the ITAA 1997 which relevantly flags that for small business relief purposes, a spouse or a child under 18 years may also be an affiliate under section 152-47.

Subsection 152-47(1) of the ITAA 1997 applies if:

(a)  one entity (the asset owner) owns a CGT asset; and

(b)  either:

(i)    the asset is used, or held ready for use, in the course of carrying on a business in an income year by another entity (the business entity), or

(ii)   the asset is inherently connected with a business that is carried on in an income year by another entity (the business entity), and

(c)   the business entity is not (apart from this section) an affiliate of, or connected with, the asset owner.

Subsection 152-47(2) of the ITAA 1997 states that for the purposes of determining whether the business entity is an affiliate of, or is connected with, the asset owner, take the following to be affiliates of an individual:

(a)  a spouse of the individual;

(b)  a child of the individual, being a child who is under 18 years.

In this case, if Individual 1 was not an affiliate of Individual 2 under subsection 328-130(1) of the ITAA 1997, Individual 1 is deemed an affiliate under section 152-47 of the ITAA 1997 as:

(a)  Individual 1 owns the CGT asset being their ownership interest in the Property; and

(b)  The Property is used in the course of carrying on a business by the business entity; and

(c)   The business entity is not otherwise an affiliate of or connected to Individual 1; and

(d)  Individual 1 is Individual 2's spouse.

Active asset test

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if:

(a)  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, or

(b)  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 7½ years during the test period.

Under subsection 152-35(2) of the ITAA 1997, the period:

(a)  begins when you acquired the asset; and

(b)  ends at the earlier of:

(i)    the CGT event; and

(ii)   if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

The Property was an active asset of Individual 1 and Individual 2 for a period of more than 20 years when it was used to carry on their business as partners in the Partnership. The Property was also an active asset of Individual 2 for the same period of time, on the basis that it was used by their affiliate (Individual 1) to carry on the business as a partner in the Partnership.

The Property has been owned by the Owners for a period of more than 15 years. As it has been an active asset for more than 7 ½ years during this time, subsection 152-35(1)(b) of the ITAA 1997 is satisfied.

Paragraph 152-10(1)(d) of the ITAA 1997 is satisfied, all required basic conditions of subsection 152-10(1) of the ITAA 1997 will be satisfied.

Question 2

Summary

The requirements to allow the Owners to apply the small business 15-year exemption to the sale of the Property are satisfied. These include the basic conditions as outlined in question one of this ruling. They each owned the Property for more than 15 years and all individuals will be at least 55 years at the time the CGT event occurs. Furthermore, the sale of the Property will happen in connection with the Owners' retirement.

Detailed reasoning

15-year exemption

Subdivision 152-B of the ITAA 1997 outlines the conditions that need to be met for a capital gain to be disregarded under the small business 15-year exemption.

Under section 152-105 of the ITAA 1997, an individual can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a)  the basic conditions in Subdivision 152-A are satisfied for the gain;

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

(c)   if the CGT asset is a share in a company or an interest in a trust - the company or trust had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset;

(d)  either:

(i)    you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

(ii)   you are permanently incapacitated at the time of the CGT event.

Application to your circumstances

As outlined in question one, the basic conditions for relief in Subdivision 152-A of the ITAA 1997 will be satisfied for the expected gain from the proposed sale of the Property satisfying paragraph 152-105(a) of the ITAA 1997.

The Owners have owned the Property for at least 15 years and therefore paragraph 152-105(b) of the ITAA 1997 will be satisfied.

The Owners will each be over the age of 55 and will retire in connection with the sale of the Property, satisfying paragraph 152-105(d) of the ITAA 1997.

As all the conditions of section 152-105 the ITAA 1997 will be satisfied, the 15-exemption can be applied to the sale of the Property and each Owner will be entitled to disregard their capital gain.

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