Edited version of private advice

Authorisation Number: 1052281419936

Date of advice: 26 July 2024

Ruling

Subject: CGT small business concessions - retirement exemption

Question 1

Is the capital gain made by the Taxpayer on the sale of the Property a discount capital gain within the meaning of section 115-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The Taxpayer acquired the Property more than 12 months before the CGT event that brought their ownership interest to an end. The Property was disposed of after 21 September 1999 with a cost base that has been calculated without reference to indexation at any time. Therefore, the capital gain made by the Taxpayer on the disposal of the Property is a discount capital gain.

Question 2

Does the Taxpayer satisfy the basic conditions in subsection 152-10(1) of the ITAA 1997 in respect of their 50% interest in the Property acquired in 19XX?

Answer

Yes. On disposal of the Property, a CGT event occurred which resulted in a gain. The net value of assets and entities connected or affiliated with the Taxpayer is under $Xm. The Taxpayer's dwelling and holiday home are not included in the net asset value, nor are the liabilities associated with them. The active asset test is satisfied because the Taxpayer owned the Property for more than 15 years and it was used in the business of a connected entity, for more than 7.5 years. Therefore, the basic conditions are satisfied for the Taxpayer's interest in the Property acquired in 19XX.

Question 3

Can the Taxpayer apply the small business 50% reduction under section 152-205 of the ITAA 1997 on the sale of their interest in the Property acquired in 19XX?

Answer

Yes. As the Taxpayer satisfies the basic conditions in section 152-10 of the ITAA, the amount of the capital gain remaining after applying step 3 of the method statement in subsection 102-5(1) of the ITAA 1997 is reduced by further 50%.

Question 4

Can the Taxpayer disregard all or part of the capital gain they make on the sale of their interest in the Property acquired in 19XX under section 152-305 of the ITAA 1997?

Answer

Yes. As the Taxpayer satisfies the basic conditions in section 152-10 of the ITAA, they can choose to disregard all or part of the capital gain up to the lifetime limit of $500,000.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer and their late spouse acquired a Property (the Property) in 19XX.

The Taxpayer's spouse passed away in 20XX. On their passing, the Taxpayer became the sole owner of the Property.

The Taxpayer entered into a contract to sell the Property in 20XX.

The cost base for the Property will be worked out using a cost base that has been calculated without refence to any indexation.

The Taxpayer is over 55 years old.

The Taxpayer has not previously disregarded any capital gains under the small business retirement exemption in subdivision 152-D of the ITAA 1997.

The Taxpayer previously held shares in a related company. The company carried on a business.

The company used the Property in the course of carrying on its business for more than 15 years.

The company did not enter into a formal lease agreement with the Taxpayer and did not pay any rent to the Taxpayer.

The company did however pay for outgoings of the Property on behalf of the Taxpayer.

The Taxpayer was a director of and held 100% of ordinary shares in the company from incorporation until 20XX.

In 20XX the Taxpayer transferred their shareholding in the company to other family members.

Assets

The Taxpayer held the following assets just before the CGT event:

1.    The Property

2.    bank accounts

3.    their main residence, which has not been used for income producing purposes at any time

4.    a holiday home which is used solely for personal use and has never derived any rent or fees for allowing friends and family to use the Property, and

5.    rights to amounts payable out of a superannuation fund.

Liabilities

The Taxpayer had the following liabilities just before the contract to sell the Property:

1.    Real estate commission

2.    land tax for the Property

3.    council rates for the Property

4.    fees for tax advice on the sale of the Property

5.    conveyancer fees

6.    land tax for the holiday home

7.    an instalment of council rates for the Taxpayer's main residence

Before the CGT event, the Taxpayer entered into an agreement that provided the real estate agent an exclusive authority to sell the Property. Under the agreement, commission is due and payable to the real estate agent upon the Property being sold. The agreement defines this as a result of obtaining a binding offer.

The land tax assessment notice was issued and was based on the land owned by the Taxpayer on 31 December 20XX. An apportionment of land tax in the State between a vendor and purchases under a contract of sale of land was prohibited. Therefore the Taxpayer is not permitted to pass on any portion of the land tax to the purchaser at settlement.

The council rates for the Property were issued. An amount of the rates remained outstanding at settlement and is expected to be recovered.

Tax advice fees incurred before the CGT event was invoiced to the Taxpayer before the CGT event.

Conveyancer fees were charged at settlement of the Property sale. There was an additional fee payable for out of scope work, also charged at settlement.

Apart from personal effects, the Taxpayer did not hold any other CGT assets just before the sale of the Property.

The Taxpayer did not hold any interests in any companies, unit trusts or partnerships just before the sale of the Property and was not entitled to any distributions of income or capital from any discretionary trusts in the past 4 years.

There were no companies or individuals that would be affiliates of the Taxpayer before the sale of the Property as they were not in a position to influence the business affairs of any individuals or companies at that time.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 115-5

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-15/p>

Income Tax Assessment Act 1997 section 152-205

Income Tax Assessment Act 1997 section 152-305

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