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Ruling

Subject: Capital Gains Tax - Small Business Concessions

Question

Does the 15 year exemption in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the sale of your property and the business operated thereon?

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

A taxpayer has operated a business for many years. Initially, it was conducted in conjunction with another person, then he operated it as a sole trader until entering into partnership with his wife.

The business has operated from its present location for a number of years. The contracts have not been exchanged as yet. The premises were initially leased but subsequently the property was purchased. The acquisition was made in the joint names of husband and wife.

The partners are in the process of selling the business and premises. The business is being sold as a going concern. The net value of any CGT assets is less than $5 million. Both partners are over fifty five years of age and will retire upon completion of the sale of the business and premises.

Relevant legislative provisions

Section 104-10 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 152-105 Income Tax Assessment Act 1997

Reasons for decision

Summary

In order to gain access to the small business concessions, the basic conditions in section 152-10 must be met. Amongst other considerations, in order to meet the basic conditions, the active asset test must be passed. For the test to be passed, the asset in question must be an active asset.

In the present case, the assets are active assets, the active asset test is met and the basic conditions satisfied. Therefore, the small business concessions are available.

In addition, eligibility for the fifteen year exemption exists. As a result, the entire gain can be disregarded.

Detailed reasoning

Section 104-10 states that CGT event A1 happens when you dispose of a CGT asset. However, the small business concessions 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, the basic conditions in section 152-10 must be met. 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 have indicated in your ruling application that the requirements of c) are satisfied.

On that basis, the basic conditions will be met if the requirements of paragraph 152-10(1)(d) are satisfied. That means that the active asset test in section 152-35 must be passed.

Sub-section 152-35(1) states that a CGT asset satisfies the active asset test if:

o 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

o 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.

Therefore, there are effectively two conditions required to pass the test. Firstly, the asset must be an active asset and secondly it must have been used as such for at least seven and a half years if held for more than fifteen.

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.

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 the present case. As a result, both the property and the goodwill would fall within the definition of an active asset in subsection 152-40(1).

As the assets have been both held for more than fifteen years and employed as active assets throughout that period, the active asset test is satisfied and the conditions of section 152-35 are met. Consequently, all of the basic conditions in section 152-10 to qualify for the small business concessions have been met.

Section 152-105 provides that you may be able to disregard a capital gain if, in addition to satisfying the basic conditions, you continuously owned the relevant asset for the fifteen year period immediately preceding the CGT event. As specified above, in the present case the asset has been held for more than fifteen years.

Where eligibility for the 15-year exemption is established, it is not necessary to resort to the other concessions because the whole gain is made exempt. If you are a partner in a partnership, you can use the 15-year exemption if at the time the CGT event happened you were either:

o aged 55 years or more and the event happened in connection with your retirement, or

o permanently incapacitated.

In the present case both parties are over fifty-five years of age and have both held the asset for more than fifteen years and employed it as an active asset throughout that period. The sale is in respect of their retirement. Therefore under subdivision 152-D the capital gain can be entirely disregarded. There is no need to offset the gain with any current year or prior capital losses before applying the 15-year exemption.