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Ruling

Subject: Capital gains tax - small business roll-over

Question

Will the small business roll-over in Subdivision 152-E of the Income Tax Assessment Act 1997 (ITAA 1997) continue to apply to the end of the replacement asset period if the replacement asset is purchased by your self managed superannuation fund?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You sold a rural property several years ago and you chose the small business roll-over in relation to the capital gain from the sale.

You and another individual acquired a new rural property on which you intended to carry on a primary production business in partnership.

It was subsequently decided to put the new property on the market.

You never commenced a primary production business on the new property, and a private ruling issued to you in which you were advised that your interest in the new property was not considered to be an active asset at the end of the replacement asset period.

An extension of the replacement asset period was subsequently granted as you were looking for another rural property as a replacement asset.

You are now considering the purchase of the replacement property to be by your self managed superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 103-25(1)

Income Tax Assessment Act 1997 Section 104-197

Income Tax Assessment Act 1997 Subsection 152-305(1)

Income Tax Assessment Act 1997 Section 152-315

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, 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

CGT event J5 under section 104-197 of the ITAA 1997 happens if you choose to obtain a small business roll-over, and by the end of the replacement asset period you have not acquired a replacement asset, and have not made a capital improvement to an existing asset, or the replacement or capital improved asset is not your active asset.

In your case, if the replacement property is acquired by your self managed superannuation fund and not by you, CGT event J5 will happen as you will not have acquired a replacement asset, or alternatively, the replacement asset will not be your active asset, by the end of the replacement asset period.

When CGT event J5 happens, you will make a capital gain equal to the amount of the capital gain previously disregarded under the small business roll-over.

The time of the event is at the end of the replacement asset period. This means that even if the replacement property is acquired by your self managed superannuation fund, you will be able to continue to roll-over the capital gain from the sale of your original property to the end of the replacement asset period .

A capital gain from CGT event J5 may be eligible for the retirement exemption if you meet the relevant conditions. You don't need to meet the basic conditions again but you must meet the retirement exemption conditions. However, you can not apply the 50% discount, small business 50% active asset reduction or the 15 year exemption to reduce this gain.

The retirement exemption conditions for an individual are contained in subsection 152-305(1) of the ITAA 1997 which provides that you can choose to disregard all or part of a capital gain under this exemption if:

· if you are under 55 just before you make the choice - you contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund or a retirement savings account and

· if the relevant CGT event is CGT event J5 - the contribution is made when you made the choice.

Under subsection 103-25(1) of the ITAA 1997, the choice must be made:

· by the day you lodge your income tax return for the income year in which the relevant CGT event happened or

· within a further time allowed by the Commissioner.

Section 152-315 of the ITAA 1997 also requires that the choice must be made in a way that ensures that the CGT retirement exemption limit, which is currently $500,000, is not exceeded. The amount chosen for the asset is its 'CGT exempt amount', which must be specified in writing.