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Edited version of private advice
Authorisation Number: 1012680367133
Ruling
Subject: CGT - small business 15 year exemption
Questions
1. Will you be entitled to the small business 15 year exemption?
Answer:
Yes.
2. Will you be entitled to the small business 50% active asset reduction or retirement exemption?
Answer:
Not applicable.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
You purchased a farm lot of X acres in February 199X.
The farm was purchased jointly by the partners. It has operated as a partnership since date of purchase.
Income and expenditure have been included in the partnership tax return every year since acquisition.
You have never used the land farm land for anything else other than a working farm.
The sale of the land will be in connection with your retirement.
Your annual turnover does not exceed $2 million.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 152-B,
Income Tax Assessment Act 1997 Subdivision 152-C,
Income Tax Assessment Act 1997 Section 152-15 and
Income Tax Assessment Act 1997 Section 152-35 .
Reasons for decision
Basic conditions
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. Subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies the small business 50% active asset reduction provided the basic conditions are satisfied.
A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied:
• A CGT event happens in relation to a CGT asset of yours in an income year,
• The event would have resulted in a gain,
• The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and
• 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 in section 152-15 of the ITAA 1997,
• 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, or
• you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.
Active asset test
The active asset test is satisfied if:
• 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 test period detailed below, or
• 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 7.5 years during the test period.
A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.
In your case, you satisfy the active asset test as you have owned the land for more than 15 years and the asset was an active asset for more than 7.5 years.
Therefore, you satisfy the basic conditions as the land is considered to be an active asset and you are a small business entity.
15 year exemption
Subdivision 152-B of the ITAA 1997 provides a small business 15 year exemption as part of the capital gains tax (CGT) small business relief provisions. If you qualify for the small business 15 year exemption, the capital gain is entirely disregarded and it is unnecessary to apply any other concessions.
If you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:
(a) the basic conditions are satisfied,
(b) you continuously owned the CGT asset for the 15 year period ending just before the CGT event,
(c) if the CGT asset is a share in a company or an interest in a trust, the company or trust had a significant individual for a total of at least 15 years, and
(d) either:
(i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement, or
(ii) you are permanently incapacitated at the time of the CGT event.
In your case, you satisfy the basic conditions, you have owned the farming land for more than 15 years and you are both 55 years or older and the sale will happen in connection with your retirement. Therefore the 15 year exemption will apply to disregard the capital gain you will make on the sale of the farm land.
50% active asset reduction and retirement exemption
As you qualify for the small business 15 year exemption, you can entirely disregard the capital gain and do not need to apply any other concessions.