Edited version of your written advice

Authorisation Number: 1013055985933

Date of advice: 21 July 2016

Ruling

Subject: Small business concessions

Question

Are the partners entitled to use the retirement exemption under subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You are a partnership.

Both Partners are over 55 and haven't used the retirement exemption previously.

You own commercial office space.

The property has now been sold

During the period of ownership, the property was leased to a business, the shares in which are owned 100% by a trust.

For at least one of the last four years, the trust has distributed at least 40% if its profits to each of the partners.

Your annual turnover, and the turnover of your related entities, is less than $2million.

The net assets of you and your connected entities are less than $6million.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 152-A

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 your case, you satisfy the small business entity test.

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.

However, the use of an asset by a relevant entity is treated as the use by the asset owner, even if the asset owner receives rent from the relevant entity for the use of that asset.

An entity controls a company if it or its affiliate owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company.

A beneficiary is taken to control a discretionary trust only if, for any of the four income years before the year for which relief is sought for a CGT event:

• the trustee paid to, or applied for the benefit of, the beneficiary or their affiliates, or both the beneficiary and any of its affiliates, any of the income or capital of the trust, and

• the amounts paid or applied were at least 40% of the total amount of income or capital paid or applied for that income year.

In this case, you have owned the property for less than 15 years and it has been used in the course of carrying on a business by entities connected to the partners for the entire ownership period. Therefore, the property will satisfy the active asset test.

Small business retirement exemption

If you are an individual, you can choose to disregard all or part of a capital gain if:

• you satisfy the basic conditions

• you keep a written record of the amount you chose to disregard (the CGT exempt amount), 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).

The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) 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. This includes amounts disregarded under former (repealed) retirement exemption provisions.

In this case, as discussed above, the partners satisfy the basic conditions. Provided they keep a written record of the amount they chose to disregard, they are entitled to the small business retirement exemption. As they are over 55 years of age, they are not required to contribute any amount to a complying superannuation fund or RSA.