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Ruling

Subject: small business concessions

Question 1

Has the taxpayer met the requirements under Subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997) to choose to apply the small business 50% reduction to all or part of his capital gain?

Advice/Answers

Yes

Question 2

Has the taxpayer met the requirements under Subdivision 152-D of the ITAA 1997 to choose the small business retirement exemption to disregard all or part of his capital gain?

Advice/Answers

Yes

This internal advice applies for the following period

Year ended 30 June 2012

Year ended 30 June 2013

Relevant facts

You are over 55 years of age.

You are not a small business entity.

You and your spouse are equal 50% partners in the partnership. The partnership carries on a primary production business on the properties listed below. The partnership is a small business entity for the purposes of the CGT small business concessions.

You are not retiring and the partnership will continue to farm the land after the transfer of property as detailed below.

You satisfy the maximum net asset value test as the value of CGT assets owned by you, entities connected with you, and your affiliates is less than $X million.

Property A

You were gifted property A over 20 years ago.

The land has been used by the partnership in their business since the year after acquisition.

You intend to transfer a 50% share of property A to your child in the year ended 30 June 2012.

The market value of the property is approximately $xx.

You wish to apply the retirement exemption to the gain from the part disposal of property A.

Property B

You and your spouse acquired property B nearly 15 years ago.

The land has been used by the partnership in their business since that time.

You intend to transfer 50% of your 50% share (i.e. 25%) of property B to your son.

The market value of the entire property is approximately $xx.

You wish to apply the 50% CGT discount, the 50% active asset exemption and the CGT Small business retirement exemption to the part disposal of the 25% share of property B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subsection 152-40

Income Tax Assessment Act 1997 Section 152-40(4)

Income Tax Assessment Act 1997 subdivision 152-B

Income Tax Assessment Act 1997 subdivision 152-C

Income Tax Assessment Act 1997 subdivision 152-D

Income Tax Assessment Act 1997 subdivision 152-E

Reasons for decision

Basic conditions

Where a CGT asset owned by a partner is used in the partnership business, small business relief may be available where:

(a) the partner satisfies the maximum net asset value (MNAV) test ; and

(b) the partnership is a small business entity for the year, and

(c) the CGT asset of the partner meets the active asset test.

Some of the concessions available under the small business relief provisions have additional conditions to be satisfied.

The active asset test (section 152-35 of the ITAA 1997) requires an active asset owned for less than 15 years to have been an active asset for at least half of the ownership period, or for at least 7 ½ years where the CGT asset has been owned for more than 15 years.

Section 152-40 of the ITAA 1997 provides a CGT asset is an active asset of yours where it is used in the course of carrying on a business by an entity connected with you, and the exceptions of section 152-40(4) of the ITAA1997 do not apply.

In your case,

(a) You satisfy the MNAV test

(b) the partnership is a small business entity

(c) You have owned the CGT asset of property A for 20 years and it has been used in the business of the partnership for the entire period. You have owned the CGT asset of property B for almost 15 years and it has been used in the business of the partnership for the entire period. The active asset and active asset tests have therefore been satisfied.

Small business relief

There are 4 available small business concessions where the basic conditions for relief are satisfied;

· the 15-year exemption (subdivision152-B)

· the small business 50% reduction (subdivision 152-C)

· the retirement concession (subdivision 152-D)

· the roll-over (subdivision 152-E).

The 15-year exemption

You advise you do not satisfy the conditions for this concession.

The small business 50% reduction

Only the basic conditions for relief are required to be satisfied in order to access this concession. Where a gain has already been reduced by the discount percentage, the 50% reduction under subdivision 152-C applies to that reduced gain.

The retirement concession

An individual who is over 55 can choose to disregard all or part of a capital gain under this concession, as long as the basic conditions for relief are satisfied. There is a lifetime limit of $500,000 (CGT exempt amount) for amounts to be disregarded under this subdivision. The choice must be specified in writing and you must ensure your CGT exempt amount is not exceeded.

The roll-over

This concession allows you to defer the making of a gain if the basic concessions are satisfied.

Conclusion

You satisfy the conditions to apply the 50% reduction and the retirement concession (subject to the CGT lifetime limit) to the discounted capital gains from the disposal of the properties.

Additional information

Market value of the properties

As you have stated, where the parties to an acquisition and disposal of an asset did not deal with each other at arm's length in connection with the disposal, market value consideration for the acquisition and disposal may be deemed to be given and received.

The Tax Office has issued a fact sheet "Market valuation for tax purposes" as guidelines for taxpayers and their advisers (including valuers) on the processes to establish a market value for taxation purposes.

A copy is available at www.ato.gov.au/print.asp?doc=/content/00161737.htm