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Ruling

Subject: CGT small business concessions

Question 1

Do you satisfy the basic conditions in subsection 152-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the sale of your interest in the property?

Answer

Yes

Question 2

Will the small business 50% reduction in Subdivision 152-C of the ITAA 1997 apply to allow you to reduce the discounted capital gain?

Answer

Yes

Question 3

If you do not exceed the lifetime limit of $500,000, will the small business retirement exemption in Subdivision 152-D of the ITAA 1997 apply to allow you to disregard the capital gain?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are over 55 years of age.

You are s medical specialist. You provide your services through company A. You are the director and sole shareholder of this company.

In the capacity as tenants in common you purchased a 50% interest in a property.

The property was vacant at the time of purchase.

You were issued a Medicare provider number enabling you to conduct a medical practice.

The property was rented to company A from settlement until it was sold. Company A has been the sole occupant and only tenant of the surgery. Company A is a small business entity. It used the property in carrying on its business for this entire period. You are the sole shareholder of company A.

From the time of settlement company A used the premises for storage and archival of medical supplies, stocks, medical equipment, journals, reference materials/books, patients' private medical records/documents/information, associated business and medical records. Renovations to the surgery were carried out.

When you obtained a Medical Surgery Permit all the medical and business activity of company A was moved to the surgery. This included consultations, physical examinations and other medical services which are permitted only on licensed premises.

You have provided letters from two real estate agents who assessed the market sale price of the property around the time of sale. You determined a fair market value for your interest in the surgery based upon these assessments.

Your interest in the property was sold for this 'market value".

You have made a capital gain from the disposal of your share of the property.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 subsection 152-10(1A)

Income Tax Assessment Act 1997 subsection 152-10(1B)

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-C

Income Tax Assessment Act 1997 section 152-D

Income Tax Assessment Act 1997 section 328-125

Reasons for decision

Question 1

Basic conditions

Subsection 152-10(1) of the ITAA 1997 contains the following basic conditions to be satisfied:

(a) a capital gains tax (CGT) event happens in relation to a CGT asset of yours in an income year..

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

(c) 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 of the ITAA 1997

(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 in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year

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

All of these basic conditions need to be satisfied for you to qualify for the small business CGT concessions. Some concessions also require that other conditions be satisfied.

Basic condition (a)

CGT event A1 under section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, happened when you disposed of your property, which is a CGT asset, and this condition is satisfied.

Basic condition (b)

The above CGT event resulted in the capital gain from the disposal of the property, and this condition is satisfied.

Basic condition (c)

The maximum net asset value test in section 152-15 of the ITAA 1997 requires that the total net value of CGT assets owned by you, entities connected with you, and any affiliates of yours or entities connected with those affiliates did not exceed $6 million just before the CGT event that results in the capital gain for which the concessions are sought.

You have advised that you satisfy the maximum net asset value test, and this condition is satisfied.

Basic condition (d)

The active asset test in section 152-35 of the ITAA 1997 requires the CGT asset that gave rise to the capital gain to be an active asset for a particular period.

Active asset

Section 152-40 of the ITAA 1997 provides that a CGT asset of yours is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate, or another entity that is connected with you. However, an asset is specifically excluded from being an active asset if its main use is to derive rent.

Section 328-125 of the ITAA 1997 provides, in part, that an individual is connected with a company where they beneficially own at least 40% of the voting power in the company.

In your case, you did not use, or hold the property ready for use, in the course of carrying on a business. The property was used by company A for the greater part of your ownership period in the course of carrying on its business. Therefore, for the property to be an active asset for this period and satisfy the active asset test, company A will need to be an affiliate or a connected entity of yours.

The property was used as a medical surgery by company A for a period of four years. You are 'connected with' company A as you hold 100% of the voting rights in the company. The property is therefore an active asset for the period it was used in the business of company A.

Active asset test

Section 152-35 of the ITAA 1997 provides that when you have owned a CGT asset for less than 15 years, the asset must have been an active asset of yours for at least half of the period you owned it.

You owned the CGT asset for a period of just over six years and it was an active asset for more than four years. The asset therefore satisfied the active asset test.

Conclusion

As discussed above, the basic conditions in subsection 152-10(1) of the ITAA 1997 need to be satisfied for you to qualify for the small business CGT concessions.

As you satisfy all of the basic conditions, you qualify for the small business CGT concessions provided that any other conditions specific to the particular concessions are satisfied.

Question 2

Small business relief

If the basic conditions for relief are satisfied, capital gains can be reduced by various concessions in Division 152 of the ITAA 1997. Some of the concessions have additional, specific conditions that must also be satisfied.

The 50% reduction

This concession may be accessed if you satisfy the basic conditions for relief. There are no additional conditions.

If the capital gain has already been reduced by the discount percentage, the 50% reduction applies to that reduced gain.

You are able to apply this concession.

Question 3

Retirement exemption

The small business retirement exemption provides that if you are over 55 year of age and the basic conditions for relief are met, you can choose to disregard all or part of the gain up to the CGT retirement exemption limit (currently $500,000). For those over the age of 55, there is no requirement to make a superannuation contribution.

The CGT exempt amount must be specified in writing.

You are over 55 at the time of the CGT event. You are, subject to the retirement exemption limit, able to access this concession.