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Ruling

Subject: Capital Gains Tax - Small Business Concessions

Question

Can you apply the retirement exemption in section 152-305 of Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997), to any capital gain arising from the sale of your asset where it was used exclusively by you?

Answer

Yes.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The taxpayer is a sole business proprietor. He has owned an asset for several years. The asset was always used by the taxpayer. At no time during his ownership was the asset leased to other parties. The taxpayer is over fifty five years of age and has no plans to re-enter the workforce. The taxpayer has advised that his business turnover was less than $1 million for the relevant year.

Relevant legislative provisions

Section 104-10 Income Tax Assessment Act 1997

Section 108-05 Income Tax Assessment Act 1997

Section 152-10 Income Tax Assessment Act 1997

Section 152-35 Income Tax Assessment Act 1997

Section 152-40 Income Tax Assessment Act 1997

Section 152-305 Income Tax Assessment Act 1997

Reasons for decision

Unless otherwise specified, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

Summary

You can apply the retirement exemption up to your lifetime limit of $500,000. If you wish, the small business 50 per cent reduction may be applied first. The retirement exemption would then apply to the remainder.

Detailed reasoning

Section 108-5 provides the statutory definition of a CGT asset. Paragraph 108-5(1)(b) includes in that definition a legal and equitable right that is not property. Your asset confers a statutory right and therefore falls within the definition.

Section 104-10 states that CGT event A1 happens when you dispose of a CGT asset which means that the sale of the asset will result in the occurrence of event A1. However, there are several concessions which may reduce or eliminate liability to pay tax on capital gains associated with the disposal of CGT assets. Those concessions are available, where certain qualifications are met, in respect of assets which are classified as active assets of a business.

In order to gain access to the concessions, you must meet the basic conditions in section 152-10. The basic conditions are:

a) that a CGT event happens to the asset;

b) the event would have resulted in the gain in question;

c) that at least one of the following applies:

(i) you are a small business entity for the income year;

(ii) you satisfy the maximum net asset value test in section 152-15;

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

d) that the relevant CGT asset satisfies the active asset test in section 152-35.

Both a) and b) are satisfied and you would also satisfy the requirements of c) based on the information supplied with your ruling application. Consequently, the basic conditions will be met if the active asset test in section 152-35 is satisfied.

The meaning of an active asset is provided in section 152-40. Sub-section 152-40(1) states:

(1) 'A CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

In your case, you own the asset and used it in the course of conducting your business. Consequently, it would fall within the definition of an active asset in subsection 152-40(1).

Paragraph 152-40(4)(e) qualifies the definition by listing classes of assets which would not constitute active assets. However, none of those exclusions are applicable in your case.

As stated above, for the CGT small business concessions in Division 152 to apply, the CGT asset must satisfy the active asset test in section 152-35. The active asset test is satisfied if:

§ 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 period of ownership, or

§ 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 and a half years.

It has been established above that the asset is an active asset and, as you have employed it as an active asset throughout the period of ownership, the active asset test is satisfied. Consequently, all of the basic conditions to qualify for the small business concessions, including the small business 50 per cent reduction, have been met.

Other than meeting the basic conditions, the only other condition that must be satisfied in order to qualify for the retirement exemption in section 152-305 is a requirement to make an appropriate superannuation contribution if you are under 55 years of age at the relevant time, a circumstance that does not apply in your case. As a result, on the basis of the information supplied, you will also qualify for the retirement exemption.

Therefore under subdivision 152-D you can disregard the remainder of the capital gain after the other concessions such as the small business 50 per cent reduction have been applied, as long as you have specified the relevant amount in writing and do not exceed the CGT retirement exemption limit of $500,000.