Edited version of private advice

Authorisation Number: 1052246372929

Date of advice: 7 May 2024

Ruling

Subject: CGT - small business concessions

Question 1

Will you satisfy the basic conditions for the capital gains tax (CGT) small business concessions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will you qualify for the small business 15-year exemption under section 152-105 of the ITAA 1997 in relation to the sale of the property?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You are in a de facto relationship.

In the 19XX income year, you and your de facto partner acquired the property as tenants in common, each with a 50% interest in ownership.

From 19XX to 20XX, the property was used by your de facto partner in the course of carrying on their business as a sole trader.

In 20XX, a partnership was established, with the partners consisting of your de facto partner and their child.

From 20XX to 20XX, the property was used by the partnership in the course of carrying on a XXXX business.

From 20XX to 20XX, the property was used by your de facto partner's child in the course of carrying on their XXXX business as a sole trader.

The sum of the net value of all CGT assets owned by you and your de facto partner do not exceed $6 million.

You did not have any involvement in the XXXX businesses carried on by your de facto partner, the partnership or your de facto partner's child.

In 20XX, you and your de facto partner ceased all work activities and effectively retired.

In 20XX, the property was sold, resulting in a gain.

You are over the age of 55.

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 subsection 152-40(1)

Income Tax Assessment Act 1997 section 152-47

Income Tax Assessment Act 1997 paragraph 152-105

Income Tax Assessment Act 1997 subsection 328-130(1)

Income Tax Assessment Act 1997 subsection 328-130(2)

Reasons for decision

Basic conditions

The basic conditions for small business CGT relief, as set out in subsection 152-10(1) of the ITAA 1997 are:

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

(b)          the event 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; or

(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.

Maximum net asset value test

Section 152-15 outlines the requirements to satisfy the maximum net asset value (MNAV) test. It provides that the Taxpayer satisfy the MNAV test if, just before the CGT event, the sum of the following amounts does not exceed $6 million:

(a)          The net value of the CGT assets of the Taxpayer's;

(b)          The net value of the CGT assets of any entities connected with the Taxpayer;

(c)          The net value of the CGT assets of any affiliates of the Taxpayer's or entities connected with the Taxpayer's affiliates (not counting any assets already counted under paragraph (b)).

Active asset

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

         i.        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

         ii.        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.

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 by you, or your affiliate, or another entity that is connected with you.

Meaning of affiliate

Under subsection 328-130(1) of the ITAA 1997, 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.

Subsection 328-130(2) of the ITAA 1997 also provides that an individual is not your affiliate merely because of the nature of the business relationship shared by the individuals.

Factors that may indicate that parties are acting in concert may include family or close personal relationships; financial relationships or dependencies; relationships created through links such as common partners, directors or shareholders; degree of consultation; and whether there is an obligation to conduct business with the other. However, none of these is decisive.

However, a spouse or child under 18 can be deemed to be an "affiliate" under s 152-47 of the ITAA 1997 where an asset of the taxpayer is used in a business that the spouse or child carries on in their own right or through an entity they control. This then allows the taxpayer to access the CGT small business entity test and the "passively held" asset to qualify as an active asset.

The spouse of an individual is defined under section 995-1 of the ITAA 1997 to include another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple.

15-year exemption

Under paragraph 152-105 of the ITAA 1997, an individual can disregard a capital gain from a CGT event happening to a CGT asset if all the following conditions are satisfied:

(a)          the basic conditions for relief under section 152-10 of the ITAA 1997;

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

(c)          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.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

The words 'in connection with' can also apply where the CGT event occurs sometime before retirement. This type of case would depend on its own particular facts, and would need to be considered on a case-by-case basis. It is possible that the CGT event could occur either in anticipation of, or after, the retirement. While it may be a question of fact, the essential element will be to demonstrate that the CGT event happens as part of an actual retirement plan.

Application to your circumstances

Question 1

In this case, you owned a 50% interest in ownership of a property that was sold in the 20XX income year, resulting in a gain. Furthermore, as the sum of the net value of all CGT assets owned by you and your de facto partner do not exceed $6 million, you will satisfy the MNAV test.

In regard to the active asset test, the property was used in the course of carrying on XXXX business operated by your de facto partner as a sole trader for more than 15 years. Your de facto partner will be taken to also be your spouse. Therefore, under s 152-47 of the ITAA 1997, you will be an affiliate of your de facto partner. Thus, since the property was an active asset for an affiliate of your de facto partner for more than 7½ years, the property will satisfy the active asset test.

Therefore, you will satisfy the basic conditions for the CGT small business concessions under section 152-10 of the ITAA 1997.

Question 2

As outlined above under question 1 and 2, you will satisfy the basic conditions for small business relief and owned the property for more than 15 years before the sale of the property. Moreover, you are also over the age of 55.

Regarding whether the sale of the property happened in connection with their retirement, your effectively ceased all work activities in 20XX. Thus, you will be taken to have effectively retired in 20XX.

However, while you effectively retired in 20XX, the property continued to be used in the course of carrying on a XXXX business by your de facto partner's child, in the 20XX and 20XX income years. Furthermore, it wasn't until the 20XX income year that the property was sold. Due to the continued property use and the space between your retirement and the property sale, it is determined that the sale of the property was not part of an actual retirement plan, but rather were separate events.

Therefore, since the sale of the property did not happen in connection with their retirement, you will not qualify for the small business 15-year exemption under section 152-105 of the ITAA 1997 in relation to the sale of the property.

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