Edited version of private advice

Authorisation Number: 1052154870372

Date of advice: 10 August 2023

Ruling

Subject: CGT - small business concessions

Question 1

Do you satisfy the basic conditions in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) for small business relief upon the disposal of your interest in Property A, Property B and Property C (the Properties)?

Answer

Yes.

Question 2

Are you entitled to apply the 50% active asset reduction in Subdivision 152-C of the ITAA 1997 in relation to the disposal of your interests in the Properties?

Answer

Yes.

Question 3

Are you entitled to apply the retirement concession in Subdivision 152-D of the ITAA 1997 in relation to the disposal of your interests in the Properties?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 2022

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

You and your spouse jointly (50% each) owned the Properties.

You and your spouse conducted a business via Partnership A, which used the Properties for more than 15 years.

Partnership A, comprised three Partners, you, your spouse and Trust A.

Trust A is a discretionary trust of which Company A is the trustee.

You are the sole shareholder and sole director of Company A.

The Properties were all sold to an unrelated third party pursuant to contracts entered into in the 2021-22 income year.

You and your spouse were both under 55 at the time of the sale of the Properties.

The Partnership commenced using the Properties on the same date (the Commencement Date).

The Commencement Date occurred more than 15 years before the date of the contract of sale of the Properties.

The following events which facilitated the Partnership's use of the Properties occurred on the Commencement Date:

•         You and your spouse entered into the contract to acquire Property A with the purchase contract allowing the right to occupy upon exchange.

•         You and other Lessees entered 5-year lease agreements for Property B and Property C (the Lease), with immediate possession occurring upon signing.

The Lease did not provide an option to purchase the leased properties. The Lease required the Lessees to pay rent.

You and other Grantees entered a Deed of Option in relation to Property B and Property C on the Commencement Date (the Option).

The Option allowed you and other the Grantees the right to acquire Property B and Property C at any time in the subsequent 5 years (the Option).

The Grantees placed a caveat over the titles of Property B and Property C approximately 2 years after signing the Option. The caveat listed the Option as interest over the land prohibiting the relevant state authority from recording any dealings in Property B and Property C apart from in relation to the Option.

You and the other Grantees notified the Grantor of the intention to exercise the option on Property B and Property C approximately midway through the option period.

Approximately four years after the Commencement Date you and other Grantees exercised the Option to purchase Property B and Property C. The Contract or Purchase for Property B and Property C was subsequently entered by you less than 15 years before the contract for their sale.

If you are entitled to make a choice to apply the retirement exemption in Subdivision 152-D, and make that choice, you will contribute an amount equal to the CGT exempt amount from the sale of the Properties to a complying superannuation fund or RSA by the time you make the choice in satisfaction of paragraph's 152-305(1)(b) and (c) of the ITAA 1997.

The Partnership's aggregated turnover for the purpose of subsection 152-10(1AA) or the ITAA 1997 was less than $2 million for the 2020-21 financial year.

You did not carry on a business other than via the Partnership in the 2021-22 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 subsection 152-10(1AA)

Income Tax Assessment Act 1997 subsection 152-10(1B)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 paragraph 152-305(1)(b)

Income Tax Assessment Act 1997 paragraph 152-305(1)(c)

Income Tax Assessment Act 1997 subsection 328-110(1)

Reasons for decision

Question 1

Summary

You satisfy the basic conditions in Subdivision 152-A for all three Properties. A CGT event happened to each property resulting in a gain in each case. You were a partner in the Partnership, a CGT small business entity that used the Properties as active assets for a period including the CGT event year and sufficient to satisfy the active asset test.

Detailed reasoning

Basic conditions

Subdivision 152-A contains the basic conditions that must be satisfied for small business CGT relief. The basic conditions, as set out in subsection 152-10(1) are:

(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)        The conditions mentioned in subsection (1A) or (1B) 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.

Small business entity

Subsection 328-110(1), states the requirements of a small business entity for an income year as:

(a)  you carry on a business in the current year, and

(b)  one or both of the following applies:

                    (i)        you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million

                   (ii)        your aggregated turnover for the current year is likely to be less than $10 million

Passively held assets - partnership

The conditions in this subsection are satisfied in relation to the CGT asset in the income year if:

(a)  you are a partner in a partnership in the income year; and

(b)  the partnership is a CGT small business entity for the income year; and

(a)  you do not carry on a business in the income year (other than in partnership); and

(b)  the CGT asset is not an interest in an asset of the partnership; and

(c)   the business you carry on as a partner in the partnership referred to in paragraph (a) is the business that you, at a time in the income year, carry on (as referred to in subparagraph 152-40(1)(a)(i) or paragraph 152-40(1)(b)) in relation to the CGT asset.

CGT small business entity

Subsection 152-10(1AA) provides that you are CGT small business entity for an income year if:

(a)  you are a small business entity for the income year; and

(b)  you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

Subsection 328-110(1) provides that you are a 'small business entity' for an income year if:

(a)  you carry on a business in the current year; and

(b)  one or both of the following applies:

                    (i)        you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million;

                   (ii)        your aggregated turnover for the current year is likely to be less than $10 million.

Active asset test

Section 152-35 outlines the active assets test, as follows in subsection 152-35(1):

A CGT asset satisfies 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 period specified in subsection (2); 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 period specified in subsection (2).

Subsection 152-35(2) of the ITAA 1997 outlines that the period:

(a)  begins when you acquired the asset; and

(a)  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.

Subsection 152-40(1) states that a CGT asset is an active asset at a time if, at that time:

(a)  you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

                    (i)        you; or

                   (ii)        your affiliate; or

                  (iii)        another entity that is connected with you; or

Application to your circumstances

CGT event A1 happened to the Properties when you sold your interest in the Properties in the 2021-22 income year satisfying paragraph 152-10(1)(a).

The CGT events resulted in a capital gain from each of the Properties satisfying paragraph 152-10(1)(b).

The Partnership carried on a business in the 2020-21 income year and its aggregated turnover was less than $2 million. It was a CGT small business entity under 152-10(1AA) at the time the CGT events happened to the Properties.

You satisfied the conditions of subsection 152-10(1B) in the income year of the CGT events (2021-22 income year) on the following basis:

(a)  You were a partner in the Partnership.

(b)  The Partnership was a CGT small business entity.

(c)   You did not carry on a business other than via the Partnership.

(d)  The Properties were not an interest in an asset of the Partnership.

(e)  The business you carried on as a partner in the Partnership is the business that, at a time in the income year was carried on in relation to the Properties.

Consequently, the requirements of paragraph 152-10(1)(c) are satisfied.

You used all three Properties during your ownership period in the course of carrying on the business by the Partnership. The Properties were therefore active assets during your entire ownership period, a sufficient period to satisfy the active asset test in section 152-35. As the active asset test is satisfied for each of the Properties the final basic condition in 125-10(1)(d) is satisfied.

As you satisfy all the requirements in subsection 152-10(1) in relation to the sale of all three properties, you satisfy the basic conditions for CGT relief under Subdivision 152-A.

Question 2

Summary

As you satisfy the basic conditions in Subdivision 152-A for the sale of your interest in the Properties and the 15-year exemption does not apply, the small business 50% discount will apply unless you choose not to apply it.

Detailed reasoning

Small business 50% reduction

Under Section 152-205 the amount of a capital gain remaining after applying step 3 of the method statement in subsection 102-5(1) is reduced by 50%, if the basic conditions in Subdivision 152-A are satisfied for the gain.

However, you may choose not to apply the reduction mentioned in section 152-205 to a particular capital gain (section 152-220).

Also, the small business 50% reduction will not apply to a capital gain to which the 15-year exemption applies (section 152-215).

Application to your circumstances

As you satisfy the basic conditions in Subdivision 152-A for the sale of your interest in the Properties and the 15-year exemption does not apply, the small business 50% discount will apply unless you choose not to apply it.

Question 3

Summary

You satisfy the required conditions and are therefore entitled to choose to disregard the remaining amount of capital gain made in relation to the disposal of your interest in the Properties, up to the CGT retirement exemption limit of $500,000.

Detailed reasoning

Subsection 152-305(1) provides that if you are an individual, you can choose to disregard all or part of a capital gain if:

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

(b)  if you are under 55 just before you make the choice - you contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund or an RSA; and

(c)   the contribution is made:

                    (i)        if the relevant CGT event is CGT event J2, J5 or J6 - when you made the choice; or

                   (ii)        otherwise - at the later of when you made the choice and when you received the proceeds.

Where an individual makes the choice to apply the small business retirement exemption, the amount of capital gain chosen will be disregarded from your assessable income (subsection 152-310(1)).

The choice made must be made in a way that ensures the individual does not exceed the CGT retirement exemption limit (paragraph 152-315(2)(a)).

Subsection 152-320(1) states an individual's CGT retirement exemption limit at a time is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual under Subdivision 152-E.

Application to your circumstances

The basic conditions in Subdivision 152-A have been satisfied for the capital gain made on disposal of your interest in the Properties. Although you were under 55 years of age at the time the choice is to be made, if you make the choice, you will contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund or an RSA. On this basis the requirements in subsection 152-305(1) will be satisfied, entitling you to choose to apply the small business retirement exemption.

You have not previously utilised any amount of your CGT retirement exemption limit of $500,000.

You are therefore entitled to choose to disregard the remaining amount of capital gain made up to the CGT retirement exemption limit of $500,000, after taking into account the steps in the method statement in subsection 102-5(1).

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