Edited version of private ruling

Authorisation Number: 1011750406024

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Ruling

Subject: Small business 15 year exemption

Question 1

Can your interest in a property from which you ran your business satisfy the meaning of an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Do you meet the requirements under section 152-105 of the ITAA 1997, to apply for the small business 15 year exemption?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

12 November 2010

Relevant facts

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.

You purchased a residential property after September 1985. You operated your business as a sole trader out of this residence. You used a percentage of the house for business purposes only, for the period of your ownership.

You closed your practice and sold the property to a private resident upon your retirement.

You have advised that you satisfy the maximum net asset value test and you are over 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 118-110

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

The legislative references contained herein are from the ITAA 1997, unless otherwise stated.

Main residence exemption

You calculate your net capital gain using the framework contained in section 102-5. Under this method statement, disregarded capital gains are not taken into account under step 1 of the method statement, and therefore cannot be reduced further by the small business CGT concessions under step 4 of the method statement.

In your case, you have used part of the property as your residence. Part of your capital gain will therefore be disregarded by the main residence exemption in Subdivision 118-B.

Section 118-110 does not provide a choice, so a taxpayer cannot choose for the main residence exemption not to apply.

If you satisfy the relevant conditions in Subdivision 118-B, you will firstly apply any main residence exemption to the capital gain from the disposal of your interest in the property.

Following the application of any main residence exemption, you can then apply any small business CGT concessions for which you are eligible to the capital gain.

Active asset

For the small business capital gains tax (CGT) concessions in Division 152 to apply to reduce or disregard a capital gain, the relevant CGT asset must satisfy all the basic conditions for relief as outlined in section 152-10.

One of these conditions is the active asset test under section 152-35. This test requires that if you have owned the asset for more than 15 years, that the asset was an active asset of yours for a total of at least 7½ years.

You have advised that you used the property for the period of your ownership for business purposes being more than 15 years.

Now it is necessary to ensure that the property satisfies the meaning of an active asset under section 152-40.

Section 152-40 discusses the meaning of the active asset, and at subsection 152-40(1) states, in part, that a CGT asset is an active asset at a time if, at that time, you own the asset and 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.

You used a percentage of the property, as a sole trader for your business. As you used the property in the course of carrying on a business for more than 15 years, you satisfy the positive test in paragraph 152-40(1)(a). None of the exceptions in subsection 152-40(4) apply in this case.

As the definition of active asset does not require exclusive use of the asset for business purposes, your whole interest in the property will be an active asset under section 152-40 for the period it was used or held ready for use in the course of carrying on your business.

Small business 15 year exemption

The rules covering the small business 15-year exemption are contained in Subdivision 152-B .

Conditions to be satisfied

Section 152-110 contains the 15-year exemption rule for individuals. It applies where:

§ the basic conditions in Subdivision 152-A are satisfied for the gain;

§ the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event

§ if you are an individual:

(i) you are at least 55 years old at the time of the CGT event and the event happened in connection with the individuals retirement; or (ii) permanently incapacitated.

Where all of these conditions are satisfied, you can disregard any capital gain arising from the CGT event.

In your case, you satisfy the basic conditions specified in section 152-10. You have continuously used the property in the course of running your business for more than 15 years. You are over 55 years of age and sold the property in connection with your retirement. Therefore, we consider you meet the requirements of section 152-110 and can apply the small business 15 year exemption.

As stated previously, following the application of the main residence exemption, you can then apply the small business 15 year exemption for which you are eligible to the capital gain.