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Ruling

Subject: CGT small business concessions

Question 1

Are you entitled to the small business 50% active asset reduction?

Answer

Yes

Question 2

Are you entitled to the small business retirement exemption?

Advice/Answers

Yes

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You purchased a commercial property in 1990s.

Your business is operated through a company, of which you are the sole shareholder and director.

Prior to purchase, the business leased the property and has operated out of it since 1980s.

You ceased trading and sold the property during the 2010-11 income year.

The company was a small business entity at the time of the sale.

You were over 55 years of age at the time of the sale.

Since you have ceased trading, you have retired from work.

Relevant legislative provisions

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 Subdivision 152-C

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

Income Tax Assessment Act 1997 Subsection 328-125(2)

Reasons for decision

Basic Conditions

In order to be eligible for the small business capital gains tax (CGT) concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997:

(a) a CGT event happens in relation to an asset that the taxpayer owns

(b) the event would otherwise have resulted in a capital gain

(c) one or more of the following applies

· the taxpayer satisfies the maximum net asset value test

· the taxpayer is a "small business entity" for the income year

· the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or

· the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year and

(d) the asset satisfies the active asset test.

In your case a CGT event occurred when the property was disposed of. The CGT event will result in a capital gain if the capital proceeds exceed the cost base of the asset.

Special conditions for passively held assets

The special condition under sub-section 152-10(1A) of the ITAA 1997 is satisfied if you do not carry on business (other than as a partner) but your asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

Entity connected with you

The basic rule is that an entity is connected with another entity if either entity 'controls' the other, or both entities are controlled by a common third entity.

Where the other entity is not a discretionary trust, subsection 328-125(2) of the ITAA 1997 states you have direct control that other entity if you and your affiliates have the right to receive a percentage (the control percentage) that is at least 40% of any distribution of either the income or the capital by the other entity.

You are the sole shareholder and director of the company. You are therefore considered to control the company and the company is an entity that is connected with you for the purposes of sub-section 152-10(1A) of the ITAA 1997.

You have indicated that the company was a small business entity when the property was sold. Accordingly, you satisfy the special conditions under sub-section 152-10(1A) of the ITAA 1997.

Active asset test

Under section 152-35 of the ITAA 1997, a CGT asset satisfies the active asset test if:

(a) 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 specified in subsection (2); or

(b) 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 7½ years during the period specified in subsection (2).

As per subsection 152-35(2) of the ITAA 1997, the period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

The term 'active asset' is defined in subsection 152-40(1) of the ITAA 1997 as an asset you own and use (or hold ready for use) in the course of carrying on a business; or in the course of carrying on a business by a connected entity under paragraph 152-40(1) (c) of the ITAA 1997.

Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent can not be an active asset unless the main use for deriving rent was only temporary.

The exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will not apply in this case as it is considered that the main use of the property was for an entity connected with you to carry on a business and not to derive rent (Taxation Determination TD 2006/63).

In your case, the property was acquired by you in 1990s. The property will be considered an active asset because it has been used a business carried on by a small business entity that is connected with you. As you have held the property for a period of less than 15 years, it must have been an active asset for a least half the period of ownership to satisfy the active asset test. This test will be satisfied as property was used in the course of carrying on a graphic artist business from the date it was acquired to the date it was disposed of.

Therefore, provided the CGT event resulted in a gain, you will satisfy the basic conditions in 152-10(1) of the ITAA 1997.

Small business 50% active asset reduction

The rules covering the small business 50% active asset reduction are contained in Subdivision 152-C of the ITAA 1997.

To apply the small business 50% active asset reduction, you only need to satisfy the basic conditions for relief under section 152-10 of the ITAA 1997. There are no further requirements.

As you satisfy the basic conditions, any capital gain from the sale of the property that remains after applying any current year capital losses, any unapplied prior year net capital losses, and the CGT discount (if applicable), is reduced by 50%.

Small business retirement exemption

Subsection 152-305(1) of the ITAA 1997 allows an individual to choose to disregard some or all of a capital gain under the small business retirement exemption. An individual can choose to disregard such an amount if:

(a) the basic conditions in Subdivision 152-A are satisfied for the capital gain; and

(b) 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

You were over 55 years of age at the time of the sale of the property; therefore, you are not required to contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund or a retirement savings account. As you satisfy the basic conditions, you are entitled to choose to apply the small business retirement exemption.