Edited version of private advice

Authorisation Number: 1052368394636

Date of advice: 3 March 2025

Ruling

Subject: CGT - small business concessions

Question 1

Will section 152-80 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to allow you to apply the capital gains tax (CGT) small business concessions to disregard the capital gain under section 152-105 of the ITAA 1997 from the disposal of the deceased's interests in the farmland?

Answer

Yes.

Question 2

Are you entitled to the small business 15-year exemption under section 152-105 of the ITAA 1997 to disregard the capital gain from the disposal of your original interests in the farmland?

Answer 2

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

Person A and Person B were spouses.

Person A date of birth is XX XX XXXX.

Person A and Person B acquired farmland over 2 titles in 19XX and 19XX.

The Business was incorporated in 19YY. It was established with XXX ordinary shares. Persona A and Person B were equal shareholders and directors.

The Business is a primary production business that used the farmland from 19XX.

Person A and Person B did not carry on any other business individually or in partnership.

Person B's health began to deteriorate in 20XX.

In 20XX, a portion of the farmland was leased to an unrelated third party.

Person B passed away and Person A acquired Person B interests in the farmland.

The Business has reduced scale significantly and has been in the process of winding down as Person B and Person A were planning their retirement. This was fast tracked when Person B health started to decline.

In the year ended 20XX the Business total assessable income was $X.

Person A worked full-time in the Business from 20XX. In the last 12 months, Person A workhours in the Business have reduced. Person A intention is to transition to full retirement after the Business affairs are finalised.

A contract of sale for the farmland was signed on XX June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 128-50

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-80

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section328-130

Reasons for decision

Question 1

CGT event happens to an asset or interest within 2 years of individual death.

Section 152-80 of the ITAA 1997 explains that if an asset was owned by joint tenants and one of them dies the surviving joint tenant can apply the small business CGT concessions in the same way as the deceased would have been entitled to immediately before their death.

For the surviving joint tenant to reduce or disregard the capital gain in the same way as the deceased would have been entitled to the asset must:

•                     Be acquired by the surviving joint tenant; and

•                     the CGT event must happen to that asset with 2 years of the individuals death.

15-year exemption for individuals

An individual can disregard any capital gain arising from a CGT event if the basic conditions in Subdivision 152-A are satisfied for the gain and the individual continuously owned the CGT asset for the 15-year period ending just before the CGT event (section 152-105 of the ITAA 1997).

The individual must be either 55 or over at the time of the CGT event and the event must happen in connection with their retirement or at the time of the CGT event they are permanently incapacitated (paragraph 152-105(d) of the ITAA 1997).

However, when applying the small business CGT concessions in the same way as the deceased would have been entitled to the deceased it only required to have been 55 or over, or permanently incapacitated immediately before their death (subsection 152-80(2) of the ITAA 1997).

Basic conditions

The basic conditions in subdivision 152-A of the ITAA 1997 must be satisfied for an entity to be able to reduce its capital gains using the small business concessions.

To meet the basic conditions for relief the following must be satisfied:

•                     A CGT event happens in relation to a CGT asset of yours in an income year.

•                     The event would have resulted in a gain.

•                     At least one of the following applies:

-                    You are a CGT small business entity for the income year.

-                    You satisfy the maximum net asset value test.

-                    You are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership.

-                    You do not carry on a business, but your CGT asset is passively held and is used in a business carried on by a small business entity that is your affiliate, or an entity connected with you.

•                     The CGT asset satisfies the active asset test.

The passively held asset conditions in subsection 152-10(1A) of the ITTA 1997 are satisfied if:

•                     Your affiliate or entity connected with you is a small business entity for the same income year that the CGT event happens to you CGT asset; and

•                     You do not carry on a business; and

•                     In the income year that the CGT event happens to your asset, the same affiliate of entity connected with you must:

-                    Be using the asset in their business,

-                    Be a small business entity, and

-                    the asset must meet the active asset test.

Used by a connected entity.

An entity is connected with another entity if either entity controls the other entity (section 328-125(1) of the ITAA 1997).

In accordance with subsection 328-125(2) of the ITAA 1997, where the other entity is a company, you will control it if you, your affiliates, or you together with your affiliates have either:

•                     shares and other equity interests (or the right to acquire them) in the company that give you and/or your affiliates at least 40% of the voting power in the company; or

•                     interests (or the right to acquire them) with the right to receive at least 40% of any income or capital the company distributes.

Active asset

The CGT asset must satisfy the active asset in order to satisfy the basic conditions (section 152-35 of the ITAA 1997). The active asset test will be met if:

•                     you have owned the CGT 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 from when you acquired it to the time of the CGT event or the cessation of the business; or

•                     you have owned the CGT 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 period specified in section 152-35(2).

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

Application to your circumstances

Prior to Person B's death, Person A and Person B each held X of the X shares of the Business and was therefore directly connected to the Business immediately prior to their death.

The Business used the farmland for the last XX years in a primary production business. As the farmland has been used directly by the Business for more than 7.5 years, the farmland is considered to be an active asset.

Person B did not carry on a business individually or in partnership.

The Business had an aggregated turnover of less than $2 million for the 20XX financial year.

Person B would have been entitled to the 15-year exemption if the CGT event had occurred immediately before his death as the basic conditions were satisfied, and the Deceased owned the property which was an active asset for more then 15-years continuously up until their death.

Person B was XX years old when they passed, satisfying the requirement that they are 55 or older immediately before their death.

Person A as the surviving joint tenant are entitled to disregard the capital gain made on Person B's interests as they would have if the CGT event happened immediately before their death.

Question 2

An individual can disregard any capital gain arising from a CGT event if the basic conditions (See above Basic conditions) in Subdivision 152-A are satisfied for the gain and the individual continuously owned the CGT asset for the 15-year period ending just before the CGT event.

The individual must be either 55 or over at the time of the CGT event and the event must happen in connection with their retirement or at the time of the CGT event they are permanently incapacitated (section 152-105 of the ITAA 1997).

Connection with retirement

This phrase 'in connection with your retirement' has no statutory definition. The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with your retirement', nor does it give any indication of the degree of retirement for the purposes of the 15-year exemption.

The Macquarie Dictionary defines 'retirement' to mean 'removal or retiring from service, office, or business, especially in reaching the end of one's working life'.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. We consider that 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 a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

A CGT event may happen in connection with your retirement irrespective of whether it happens before or after your retirement; however, your retirement must have some proximity to the CGT event. That is, you must retire at or near the time of the CGT event.

Application to your circumstances

At the time of the CGT event, Person A was the sole shareholder in the Business and are therefore directly connected to the business.

The Business has used the farmland for the last XX years in their primary production business. As the farmland has been used directly by a connected entity, the Business, for the whole period of ownership, the farmland is considered to be an active asset.

Person A did not carry on a business individually or in partnership.

The Business had an aggravated turnover of less than $2 million for the 20XX financial year.

You owned your interests in the farmland for more than 15 years continuously and it was used in a connected small business entity, for more then 15-years.

In the 20XX financial, you were over 55 years old.

Person A intention for the sale of the farmland is to transition to full time retirement once the contract of sale for the farmland has settled. Further, the Commissioner considers the sale of the farmland to be in connection with your retirement as you have significantly reduced the number of hours worked.

You are able to disregard the capital gains made on your interests in the farmland under the 15-year exemption.

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