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Edited version of your written advice
Authorisation Number: 1013045455682
Date of advice: 7 July 2016
Ruling
Subject: Whether you are entitled to the CGT SB 15 year exemption
Question
Can the Capital Gains Tax (CGT) Small Business 15 year exemption in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) be applied to the capital gain from the sale of the business?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 20YY
The scheme commences on
1 July 20XX
Relevant facts and circumstances
You purchased a business more than 15 years ago.
You have operated the business as a sole proprietor continually from that date until the present day.
You entered into a sale contract to sell the business. Settlement has occurred. You made a capital gain on the sale.
In the 20XX-YY financial year you were a Small Business Entity (SBE).
You will be retaining a very small part of the business and continuing to service that part. You also will be advising the new owners for a short period.
You are over 55 years old and intend to retire immediately apart from the small amount of work you will continue to perform as described above.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 152-10
Income Tax Assessment Act 1997 section 152-15
Income Tax Assessment Act 1997 section 152-35
Income Tax Assessment Act 1997 section 152-40
Income Tax Assessment Act 1997 section 152-105
Income Tax Assessment Act 1997 section 328-125
Reasons for decision
Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are:
(a) a CGT event happens in relation to a CGT asset in an income year.
(b) the event would have resulted in the gain
(c) at least one of the following applies:
(i) you are a small business entity for the income year
(ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997
(iii) 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 or
(iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.
(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.
Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when your ownership in a CGT asset (e.g. land or buildings) is transferred to another entity.
Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.
Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if:
(a) 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 period of ownership, or
(b) 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 and a half years.
In this case, a CGT event occurred when the business was sold. You made a capital gain as a result of the sale. You were a SBE and the business was an active asset.
Therefore you satisfy the basic conditions for the small business CGT concessions.
15 year exemption
Under section 152-105 of the ITAA 1997, an individual can disregard a capital gain from a CGT event if:
(a) you satisfy the basic conditions for the small business CGT concessions;
(b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event happened; and
(c) 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
In this case you satisfied the basic conditions. You continuously owned the business for more than 15 years. You are over 55 years of age at the time of the sale. Given the limited number of hours you will continue to work servicing the small part of the business you have retained and assisting the new owners, we accept that the CGT event happened in connection with your retirement. Therefore you are entitled to disregard the capital gain under the small business 15 year exemption.