Edited version of private ruling

Authorisation Number: 1011634173635

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Ruling

Subject: Capital gains tax (CGT) - 15 year exemption CGT concession for small business

Are the applicants eligible under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply the small business 15 year CGT concession exemption to the capital gain on the sale of their business?

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The applicants purchased the business over 15 years ago. The purchase price included land and buildings.

Soon after purchase of the business, the applicants purchase one of the structures . The other structures were owned by third parties and for which a lease contact was in place. The applicants were responsible for the short term and long term accommodation in relation to all of the structures.

The applicants have supplied supporting evidence of rentals including guest registration forms and advised that they were responsible for all bookings. They advised their responsibilities also included supplying consumables and non consumables as well as general services to demonstrate that this was a full time business and active asset.

The applicants sold the business in 2010.

One applicant was permanently incapacitated at the time of the sale of the business.

One applicant was over 55 at the time of CGT event and the sale was in connection with the applicant's retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 152-5

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-105

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the applicants.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Eligibility to apply the 15 year CGT concession exemption for small business.

Small Business Concessions

Section 152-105 of the ITAA 1997 allows you to disregard any capital gain arising from a CGT event if all of the following conditions are met:

· the basic conditions in Subdivision 152-A of the ITAA 1997 are met

· you continuously owned the CGT asset for the 15 year period just before the event, and

· you are either 55 years old or over at the time of the CGT and the event happens in connection with your retirement or you are permanently incapacitated at the time of the CGT event.

Basic Conditions

The basic conditions are:

(a) a CGT event happens in relation to a CGT asset of yours in an income year. This condition does not apply in the case of CGT event D1

(b) the event would (apart from Division 152 of the ITAA 1997) have resulted in a capital gain

(c) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997; and

(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Basic condition a)

This condition requires a CGT event to happen in relation to your CGT asset in an income year. The asset in question is the caravan park (the property). A CGT asset includes any kind of property (paragraph 108-5(1)(a) of the ITAA 1997) and therefore the property is a CGT asset. The relevant CGT event will be the disposal of the property, which will cause CGT event A1 to happen (section 104-10 of the ITAA 1997).

As the CGT event, not being CGT event D1, has happened in relation to a CGT asset of the applicants in the income year, this condition will be satisfied.

Basic condition b)

The sale of the property, that is, the CGT event, will result in the capital gain, and therefore this condition will be satisfied.

Basic condition c)

You have advised that applicants satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 in that the net value of assets owned by the applicants and any related entities is $5 million or less and therefore this condition is satisfied.

Basic condition d)

This condition requires that the active asset test in section 152-35 of the ITAA 1997 is satisfied. In the applicants' case, the active asset test requires the CGT asset that gave rise to the capital gain to be an active asset for at east half the time of ownership or for seven and a half years if the asset is owned for more than 15 years.

Active Asset

For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997, it must firstly satisfy one of the positive tests in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

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

Under paragraph 152-40(4)(e) of the ITAA 1997 a CGT asset cannot be an active asset if the assets main use in the course of carrying on a business is to derive rent unless it's main use for deriving rent was only temporary.

Example:

A company uses a house purely as an investment property and rents it out. The house is not an active asset because the company is not using the house in the course of carrying on a business. If, on the other hand, the company ran the house as a guest house the house would be an active asset because the company would be using it to carry on a business and not to derive rent.

The example has similar features to the applicant's situation with regard to carrying on a business, with the applicants supplying consumables and non consumables as well as general services, maintenance of common areas, providing facilities and keeping the booking office.

The applicants were the owners of the facility which was used for both short term and long term accommodation. A large proportion of the business consisted of short term accommodation. A large proportion of the business consisted of short term accommodation. None of the exclusions apply to the property as its main use was not to derive rent, its main use was in carrying on the caravan business.

The facility was an active asset since its purchase that is for more than seven years, therefore basic condition (d) is satisfied.

Additional Conditions to be eligible for the 15 year small business exemption

As stated above in addition to the basic conditions, to access the 15 year small business from CGT you must also satisfy the following two conditions:

Firstly, you must have owned the active asset for a period greater then 15 years. The applicants owned the property for a period of over 15 years. Therefore, they satisfy this condition.

Secondly, you must be either over 55 year of age and retiring or permanently incapacitated at the time of the CGT event.

At the time of the CGT event both applicants were over 55 years of age.

The sale of the business was in connection with the retirement of one applicant.

One applicant was permanently incapacitated at the time of the sale of the business.

Based on these facts both applicants satisfy all the conditions required and can apply the 15 year small business exemption to disregard any capital gain made on the disposal of the property.