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Edited version of your written advice
Authorisation Number: 1012742695185
Ruling
Subject: The small business capital gains tax concessions
Question
Are you entitled to disregard the capital gain made on the sale of the property under the 15 year exemption set out in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2015
The scheme commences on
1 July 2014
Relevant facts and circumstances
You and your spouse purchased a property more than 15 years ago.
You and your spouse carry on a business in partnership.
The partnership is a small business entity with a turnover of less than $2 million.
The land has been used in the course of carrying on the business for the entire ownership period.
You and your spouse have been approached by a number of property developers offering to purchase the land.
At no time will you or your spouse have any involvement in the development.
You and your spouse are both over 55 years of age.
The sale of the property will happen in connection with the retirement of you and your spouse.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 152-A
Income Tax Assessment Act 1997 Subdivision 152-B
Income Tax Assessment Act 1997 section 152-35
Income Tax Assessment Act 1997 paragraph 152-40(4)(e)
Reasons for decision
The basic conditions for the small business capital gains tax concessions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are:
• the small business entity test and
• the active asset test.
Small business entity
You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover of less than $2 million.
In this case, the information provided is that partnership has a turnover of less than $2 million.
Active asset test
The active asset test is contained in section 152-35 of the ITAA 1997. 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.
The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.
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.
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 cannot be an active asset unless the main use for deriving rent was only temporary.
In this case, you have owned the property for more than 15 years and it has been used in the course of carrying on a business for the entire ownership period. Therefore, the property will satisfy the active asset test.
15 year exemption
You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you:
• satisfy the basic conditions for the small business CGT concessions and
• continuously owned the CGT asset for the 15-year period ending just before the CGT event happened.
If you are an individual:
• when the CGT event happened
• you were permanently incapacitated, or
• you were 55 years old or older, and the event happened in connection with your retirement.
Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement.
Application to your circumstances
As discussed above, the property satisfies the active asset test. You and your spouse have continuously owned the property for more than 15 years. Further, you and your spouse are over 55 years old and the sale will happen in connection with your retirement.
Therefore, you and your spouse are entitled to disregard the capital gain made on the sale of the property under the 15 year exemption set out in Subdivision 152-B of the ITAA 1997.