Edited version of private advice

Authorisation Number: 5010074021417

Date of advice: 18 May 2021

Ruling

Subject: Exemption from CGT on the sale of a property

Question

Do you satisfy the conditions to apply the capital gains tax (CGT) small business 15-year exemption in section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to the gain made from the sale of property?

Answer

Yes

This ruling applies for the following period:

Financial year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse owned as joint tenants a commercial property. The property was rented to Trust trading for more than XX years. The rent has been returned as income of a partnership, which is registered for GST.

The business was operated through a discretionary trust known as The x Trust. Business operations commenced more than XX years ago, and those operations moved to the commercial property address upon purchase of that commercial property over XX years ago. The property was used 100% by the x Trust in conducting its business operations.

The trustees are now just C and D. C and D are the only living primary beneficiaries of the trust.

Throughout the relevant period C has been in receipt of either a or a pension.

The profit distributions over the past four years has been as follows:

It was decided about after 1 July 20XX that it was time to retire and close the business operations. Trading from 1 July 20XX was profitable but once the decision was taken to close the business and retire the focus was on selling existing stock and terminating activities.

The business ceased before 31 December 20XX. You are not working at all now and are totally retired from income producing work.

The contract to sell the property was entered into and settlement occurred before 30 June 20XX. It was anticipated that the capital gain would be in the vicinity of $XXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 subsection 328-125(1)

Income Tax Assessment Act 1997 subsection 328-125(3)

Income Tax Assessment Act 1997 subsection 328-125(4)

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Subdivision 152-B of the ITAA 1997 provides a small business 15-year exemption as part of the capital gains tax (CGT) small business relief provisions. If you qualify for the small business 15-year exemption, the capital gain is entirely disregarded, and it is unnecessary to apply any other concessions.

CGT small business concessions

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'.

Basic conditions

The basic conditions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are:

• the entity satisfies one of the following tests:

(i) you are a CGT 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 was a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership

(iv) if the assets were passively held assets, the conditions in regard to affiliates and connected entities, and partnerships are met, and

• the CGT asset satisfies the active asset test.

Affiliates and connected entities

An affiliate is defined as being an individual or company who 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 individual or company (subsection 328-130 of the ITAA 1997).

An entity is connected with another entity if either entity, or its affiliate, controls the other or both entities are controlled by the same third entity in a manner as prescribed in section 328-125 of the ITAA 1997 (subsection 328-125(1) of the ITAA 1997).

An entity controls a discretionary trust, if the trustee or trustees of the trust could be expected to act in accordance with the wishes of the first entity and/or its affiliates (subsection 328-125(3) of the ITAA 1997).

In regards to a discretionary trust, subsection 328-125(4) of the ITAA 1997 states that a beneficiary controls a trust if they received at least 40% of the amount of income or capital paid or applied by the trustee in any of the last four years before the current income year.

The Trust was set up to allow income to be distributed to B, C, and D and their family. C received 40% or more of the distributions of the Trust in the financial years ended 30 June 2017 to 2020, therefore they controlled that trust and was connected to it. C is an affiliate of D and is also connected with the trust.

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 detailed below, 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 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

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

The Trust used the property in the course of carrying on a business for more than seven and a half years during the period from when the property was acquired until the business ceased.

SB CGT 15-year exemption

Under section 152-105 of the ITAA 1997, you can disregard any capital gain arising from the disposal of the asset, if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain;

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

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

Whether there is a 'retirement' for the purposes of the 15-year exemption will depend on the circumstances of each particular case. It is considered for the term to be satisfied, there must at least be a significant reduction in the number of hours the individual is engaged in present activities, or a significant change in the nature of present activities. You acquired the property more than 15 years ago, are both over 55 years of age, and are retired now.

Conclusion

The basic conditions in Subdivision 152-A of the ITAA 1997 were satisfied for the gain. You and your spouse acquired the property in March 20XX and it was sold in February 20XX. You owned the property for over 15 years and it is considered that the disposal of the property was in connection with your retirement. You satisfy the conditions for the 15-year exemption and can disregard any capital gain you made on the sale of the property in relation to your interest.

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