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Ruling

Subject: CGT - small business concessions

Question 1

Is your commercial property, which was used to derive business and rental income, an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are you considered to be an affiliate of your spouse for the purposes of the small business Capital Gains Tax (CGT) concessions?

Answer

Yes

Question 3

Do you qualify for the CGT small business 15 year exemption under Subdivision 152-B of the ITAA 1997 in relation to the disposal of the commercial property?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

01 July 2010

Relevant facts and circumstances

You were part owner of a commercial property.

Your spouse runs their business from the commercial property.

Due to a decline in your spouse's work load part of the commercial property was leased out.

Your spouse kept a workshop at the rear of the commercial property where they continued their business activities.

The comparative area of use for the commercial property was 25 percent for your spouses business and 75 percent was for the leased premises.

Initially the income from the business was more than the rent received; however after a number of years rental income has been substantially more than business income.

You owned the commercial property for longer than 15 years and it was an active asset for at least 7.5 years that you owned the property.

You have now sold the commercial property.

You satisfy the maximum net asset value test.

You are not over 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152,

Income Tax Assessment Act 1997 Subdivision 152-A,

Income Tax Assessment Act 1997 section 152-35,

Income Tax Assessment Act 1997 subsection 152-35(1),

Income Tax Assessment Act 1997 subsection 152-35(2),

Income Tax Assessment Act 1997 section 152-40,

Income Tax Assessment Act 1997 section 152-10, and

Income Tax Assessment Act 1997 section 152-105.

Reasons for decision

Note that all subsequent legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

A CGT asset is an active asset at a time if, at that time, you own the asset and:

· you use it, or hold it ready for use, in the course of carrying on a business; or

· it is used, or held ready for use, in the course of carrying on a business by your affiliate (section 152-40).

To satisfy the active asset test you must have owned the CGT asset for more than 15 years and during the specified period it must have been an active asset of yours for a total of at least 7.5 years.

The specified period for your situation begins when you acquired the commercial property and ended at the CGT event which was when you sold the property.

It should be noted that the periods in which the asset is an active asset do not need to be continuous. However, they must add up to the minimum periods specified above, depending on the total period of ownership.

From the facts provided in your case it is accepted that the commercial property has been an active asset of yours for at least 7.5 years. Accordingly the active asset test is satisfied.

Question 2

A spouse is not automatically considered to be your affiliate; however, where you own an asset that your spouse uses in a business they carry on as an individual, they will be taken to be your affiliate for the purposes of the:

· active asset test

· $6 million maximum net asset value test

· $2 million aggregated turnover test

· all the basic conditions for eligibility, and

· calculating aggregated turnover and net asset value.

In your situation, you are a part owner of the commercial property which your spouse uses in carrying out their business activities. As such you are considered to be an affiliate of your spouse for the purposes of the small business CGT concessions.

Question 3

Small business 15 year exemption for individuals

An individual can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

· the basic conditions in Subdivision 152-A are satisfied for the gain

· you continuously owned the CGT asset for the 15-year period ending just before the CGT event

· either:

· was 55 or over at the time and the event happened in connection with the individual's retirement; or

· was permanently incapacitated at that time (Section 152-105).

Basic conditions for relief

A capital gain you make may be reduced or disregarded if the following basic conditions are satisfied for the gain:

· a CGT event happens in relation to a CGT asset of yours in an income year

· the event would (apart from this Division) have resulted in the gain

· at least one of the following applies:

· you are a small business entity for the income year

· you satisfy the maximum net asset value test

· you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership

· the CGT asset satisfies the active asset test (section 152-10).

Application to your circumstances

It is accepted, from the facts provided, that you are an affiliate of your spouse and therefore meet the requirements of the basic conditions of relief. However to satisfy the requirements for the small business 15 year exemption you have to be 55 or over at the time and the event has to happened in connection with your retirement.

Therefore, as you were not 55 or over at the time of the CGT event, you do not qualify for the CGT small business 15 year exemption.