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Ruling

Subject: CGT - small business exemption

Question and answer

If your pre CGT asset is treated as a post CGT asset, are you entitled to the small business 15 year exemption?

Answer: Yes.

Relevant facts and circumstances

You owned a rural property that you operated as a primary production business for approximately 30 years.

The rural property was an active asset.

You owned the rural property for an additional three years after cessation of the business.

The sale of the rural property resulted in a capital gain.

You state that you satisfy the maximum net asset value test.

You were older than 55 years of age when you sold the asset. The asset was sold as a result of retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 104-10

Section 105-10

Section 152-10

Section 152-15

Section 152-35

Section 152-105

Section 152-205

Section 152-305

Section 152-410

Section 292-100

Reasons for decision

Contributions from CGT small business concessions

A taxpayer can make non-concessional contributions to a superannuation fund for a financial year up to a particular limit, known as the "non-concessional contributions cap".

For contributions relating to the 15 year CGT exemption for individuals, the contribution must meet the following requirements:

1. The contribution must be equal to all or part of the capital proceeds from a CGT event for which you can disregard any capital gain under section 152-105 (or would be able to do so, assuming that a capital gain arose from the event; and

2. The contribution must be made to your fund on or before the later of:

(a) the day the taxpayer is required to lodge their tax return for the income year in which the CGT event occurred; or

(b) 30 days after the day the taxpayer receives the capital proceeds from the CGT event.

Section 292-100(5) of the ITAA 1997 states when determining whether section 152-105 is satisfied in relation to a pre-CGT asset, you are able to treat the asset as a post-CGT asset.

Small business concessions

The CGT provisions provide four small business CGT concessions, namely:

· the small business 15-year exemption (section 152-105)

· the small business 50% active asset reduction (section 152-205)

· the small business retirement exemption (section 152-305) and

· the small business rollover (section 152-410)

Any capital gain that results from a CGT event may be reduced or disregarded under the small business concessions if you satisfy certain conditions. All of these concessions require that the basic conditions in subsection 152-10(1) of the ITAA 1997 are satisfied. Some of the concessions also require that other conditions are also satisfied.

15-year exemption for individuals

An individual can disregard any capital gain arising from a CGT event if the following conditions are satisfied:

· The basic conditions for small business relief are met;

· You continuously owned the CGT asset for the 15-year period ending just before the CGT event;

· You are 55 or over at the time of the CGT event and the event happens in connection with your retirement.

You continuously owned the asset in excess of 15 years.

You were over 55 at the time of the CGT event, the event happened as a result of retirement from your farming business.

Basic conditions for small business relief

The basic conditions to be satisfied for the gain are:

(a) CGT event happens in relation to a CGT asset of yours in an income year

(b) the event would (apart from this Division) have resulted in the 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.

CGT event test

Paragraphs 152-10(1) (a) and (b) of the ITAA 1997 are satisfied when you sell the property. At that time, a change of ownership constituted a disposal and CGT event A1 happened (section 104-10). The disposal of your asset has triggered a CGT event, its capital gain or loss is disregarded as it was acquired prior to 20 September 1985 (section 105-10(5) of the ITAA 1997).

Capital gain test

You indicate that the sale of the property did result in a capital gain, therefore satisfying the second condition.

Net asset value test

You have stated that you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997.

Active asset test

Finally, the active asset test in section 152-35 of the ITAA 1997 must be satisfied.

The asset does not need to be an active asset just before the CGT event.

To satisfy the active asset test, both of the requirements in paragraphs 152-35(1) and 152-35(2) of the ITAA 1997 need to be met.

Paragraph 152-35(1) of the ITAA 1997 requires that the CGT asset satisfies the active asset test if you have owned the asset for more than 15 years and the asset was an active asset of your for a total of at least 7½ years during the period specified in Paragraph 152-35(2) of the ITAA 1997.

Paragraph 152-35(2) of the ITAA 1997 states the period as beginning when you acquired the asset and the period ending at the earlier time of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows.

The CGT asset was a rural property that you operated as a primary production business from 1972 to 2005. You owned the property from 1972 to the date it was sold in 2008. Your period of ownership was 36 years of which it was an active asset for 33 years. You owned the property for more than 7 and a half years and it was an active asset, therefore satisfying the active asset test.

Conclusion

If your pre CGT asset is treated as a post CGT asset, you satisfy all of the above basic conditions in section 152-10 of the ITAA 1997 for small business relief in relation to capital gains. You would also be entitled to the small business 15 year exemption.