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Edited version of your written advice
Authorisation Number: 1012973302706
Date of advice: 19 February 2016
Ruling
Subject: Capital gains tax
Question
Will the small business 15-year exemption in Section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to allow the company to disregard any capital gain from the sale of the property?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
The scheme commences on:
1 July 2015.
Relevant facts and circumstances
The property was purchased in 19XX with the sole intention of being used as the principal residence of the only two shareholders of the company.
The property was purchased by the company as bare trustee for the shareholders.
It has been exclusively used as their sole and principal residence for the last 18 years continuously.
Both shareholders have remained the only two shareholders continuously since the company was created.
To the best of the shareholders' knowledge, the company has never opened a bank account and has never had any funds pass through it. It has never carried on any activities, derived any profits or received any distributions or made or received any loans.
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 152-110,
Income Tax Assessment Act 1997 - Section 152-35 and
Income Tax Assessment Act 1997 - Section 152-40.
Reasons for decision
Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) provides a small business 15-year exemption as part of the 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.
Under section 152-110 of the ITAA 1997, you can disregard any capital gain arising from the disposal of your property if all of the following conditions are satisfied:
(a) the basic conditions in subdivision 152-A of the ITAA 1997 are satisfied for the gain
(b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event
(c) you had a significant individual for a total of at least 15 years (even if it was not the same significant individual during the whole period) of the whole period of ownership of the CGT asset and
(d) an individual who was a significant individual of yours just before the CGT event was:
(i) at least 55 years old at that time and the event happened in connection with their retirement or
(ii) permanently incapacitated at that time.
Condition (a)
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.
Active asset test
A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event.
The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.
Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997.
The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the asset will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least half of the time period it was owned, subject to the exclusions in subsection 152-40(4) of the ITAA 1997.
In this case, you advised that the company has never carried on any activities and the property has been used exclusively as the principal residence of the company's only two shareholders. As a result, the company will not satisfy the basic conditions and therefore will not be exempt from capital gains tax resulting from the disposal of the property.