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Ruling

Subject: Capital gains tax small business concessions

Question 1

Are you entitled to apply the 50% general discount to any capital gain arising from the sale of your interests in the property?

Answer

Yes.

Question 2

Does the property satisfy the basic conditions for the small business capital gains tax concessions?

Answer

Yes.

Question 3

Are you entitled to apply the small business retirement exemption to the capital gain?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Your spouse inherited a 50% share in a property.

You purchased the other 50% share in the property.

You and your spouse have always allowed your relatives to operate their enterprise on the property.

Your spouse passed away and you inherited their 50% share of the property.

You are over 55 years of age.

You satisfy the maximum net asset value test.

The enterprise is a small business entity with an annual turnover of less than $2 million.

There is no formal lease agreement in place.

Your relatives consult you in regards to their business affairs.

You spend almost every day working as apart of the enterprise and assist with day to day activities.

You spend time each day discussing the activities carried out on the property.

You have never disregarded a capital gain under the retirement exemption.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A,

Income Tax Assessment Act 1997 Subdivision 152-D,

Income Tax Assessment Act 1997 subsection 328-125(1),

Income Tax Assessment Act 1997 section 152-35,

Income Tax Assessment Act 1997 paragraph 152-40(1)(a), and

Income Tax Assessment Act 1997 subsection 152-40(4).

Reasons for decision

Question 1

You are entitled to use the discount method to calculate their capital gain if:

· you are an individual, a trust or a complying superannuation entity

· a CGT event happens to an asset you own

· the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999

· you acquired the asset at least 12 months before the CGT event, and

· you did not choose to use the indexation method.

Generally, the discount method does not apply to companies, although it can apply to a limited number of capital gains made by life insurance companies.

For CGT purposes, if you are a joint tenant you are treated as if you are a tenant in common owning equal shares in the asset. However, if you are a joint tenant and another joint tenant dies, on that date their interest in the asset is taken to pass in equal shares to you and any other surviving joint tenants, as if their interest is an asset of their deceased estate and you are beneficiaries.

If the joint tenant who dies acquired their interest in the asset on or after 20 September 1985, the first element of the cost base of the interest you acquire from them is the cost base of their interest on the day they died, divided by the number of joint tenants (including you) who acquire it. The first element of the reduced cost base of the interest you acquire from them is worked out similarly.

As discussed above, for the discount method to apply you must have owned the asset (or your share of it) for at least 12 months. As a surviving joint tenant, for the purposes of this 12-month test, you are taken to have acquired the deceased's interest in the asset (or your share of it) at the time the deceased person acquired it.

As you have held each interest for more than 12 months, you are entitled to apply the 50% discount to each interest you hold in the property.

Question 2

The active asset reduction, and small business retirement exemption are some of the small business CGT concessions. To qualify for the small business CGT concessions you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'.

Basic conditions

The basic conditions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are:

· the $6 million limit on the net value of CGT assets

· the active asset test.

Net value of the CGT assets

You will satisfy the maximum net asset value test if, just before the CGT event that results in the capital gain, the net value of the CGT assets of you and the following entities does not exceed $6 million:

· any entities connected with you

· your affiliates and any entities connected to your affiliates (subject to certain exclusions).

An entity is connected with another entity if either entity controls the other or both entities are controlled by the same third entity under subsection 328-125(1) of the ITAA 1997.

Application to your circumstances

The information provided is that the maximum net value of your assets, and any entities connected with you would be less than $6 million just before the CGT event. Therefore you satisfy the maximum net asset value test.

Active asset test

The active asset test requires the capital gains tax (CGT) asset to be an active asset for:

· 7 years, if owned for more than 15 years, or

· half of the ownership period if owned for 15 years or less (section 152-35 of the ITAA 1997).

An active asset may be a tangible asset or an intangible asset.

A tangible or intangible asset is a CGT active asset if it is used or held ready for use in the course of carrying on a business by:

· the taxpayer

· the taxpayer's spouse or child under 18 years

· the taxpayer's affiliate, or

· an entity connected with the taxpayer (paragraph 152-40(1)(a) of the ITAA 1997).

Assets which cannot be active assets

The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997):

· interests in a connected entity (other than those satisfying the 80% test)

· shares in companies and interests in trusts (other than those satisfying the 80% test)

· shares in widely held companies unless they are held by a CGT concession stakeholder of the company

· shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply

· financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options

· an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary.

Affiliate

According to the Advanced guide to capital gains tax concessions for small business 2011-12 an affiliate must be an individual or a company and, in relation to their business, they act or could be reasonably expected to act in accordance with your directions or act in concert with you. For example:

· the existence of a close family relationship between the parties

· the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other

· the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations, and

· the actions of the parties.

Application to your circumstances

After consideration of the facts and circumstances in this case, including the lack of formal agreements, close family relationship and the actions of the parties, it is accepted that the enterprise run by your relatives is an affiliate of yours.

The property will satisfy the active asset test as it has been used to carry on a business by your affiliate for the entire period of ownership. Therefore, you satisfy the basic conditions for the small business capital gains tax concessions.

Question 3

If you are an individual, you can choose to disregard all or part of a capital gain under the retirement exemption in Subdivision 152-D of the ITAA 1997 if:

· you satisfy the basic conditions

· you keep a written record of the amount you choose to disregard, and

· if you are under 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA).

If you are 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA even though you may have been under 55 years old when you received the capital proceeds.

The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit. An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption.

In your case, you satisfy the basic conditions and are over 55 years of age. You have not previously disregarded any capital gain under the retirement exemption. Therefore, you satisfy the conditions for the retirement exemption and are not required to make a contribution to you super fund or RSA.