Edited version of your written advice

Authorisation Number: 1051181412183

Date of advice: 19 January 2017

Ruling

Subject: Capital gains tax and small business concessions

Question 1

Will Capital Gains Tax (CGT) apply to the sale of the property?

Answer

Yes.

Question 2

Will you be eligible for the CGT small business 15 year exemption in Subdivision 152-B of the Income Tax Assessment 1997 with respect to the sale of the property?

Answer

No.

Question 3

Will you be eligible to make a discount capital gain under Subdivision 115-A of the Income Tax Assessment 1997 with respect to the sale of the property?

Answer

Yes.

Question 4

Will you be eligible for the CGT small business 50% reduction in Subdivision 152-C of the Income Tax Assessment 1997 with respect to the sale of the property?

Answer

Yes.

Question 5

Will you be eligible for the CGT small business retirement exemption up to a lifetime limit of $500,000 under Subdivision 152-D of the Income Tax Assessment 1997?

Answer

Yes.

This ruling applies for the following period:

The year ending 30 June 2017.

The scheme commences on:

1 July 2016.

Relevant facts and circumstances

You are a Family Partnership.

You purchased a rural property.

You purchased the property sometime after 20 September 1985.

You have been using the property for farming from the time you acquired it and intend to do so up until the property is sold.

There is an aged dwelling on the property.

The farming activity is worked in conjunction with another property you own.

You are now selling the property as is, to decrease your workload.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Summary

You satisfy the basic conditions and active asset test. You may be eligible for multiple capital gains tax concessions upon sale of the property.

Detailed reasoning

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to a CGT asset. The most common event, CGT event A1, happens if you dispose of a CGT asset to someone else e.g. the disposal of a dwelling.

In this case, the disposal of the rural property constitutes CGT event A1.

Small business concessions

To qualify for the small business concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions.

The basic conditions in Subdivision 152-A of the ITAA 1997 which are relevant to you 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 are a family partnership and are considered to be a small business entity.

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.

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

● an intangible asset that is inherently connected with a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or another entity that is connected with you, carries on; for example, goodwill.

In your case, you satisfy the active asset test as you have held the property for less than 15 years and it has been used for the primary production for your entire ownership period.

CGT concessions

Individuals (including partners in partnerships) may be able to reduce any capital gain in the following sequence. First you offset capital losses against capital gains. Then you apply:

● the small business 15-year exemption if applicable

● the CGT discount

● the small business CGT concessions.

The small business 15-year exemption takes priority over the other small business concessions and the CGT discount. If the small business 15-year exemption applies, you entirely disregard the capital gain so there is no need to apply any further concessions.

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 (the active asset test requires the asset to have been an active asset for at least 7.5 years of the whole period of ownership)

● continuously owned the CGT asset for the 15 year period ending just before the CGT event happened.

In your case, you have not yet held the property for at least 15 years. Therefore, you do not qualify for the small business 15 year exemption at this time.

If the 15-year exemption doesn't apply, you apply the CGT discount (if applicable) to the capital gain before applying the remaining small business concessions.

If you satisfy the conditions for more than one of the remaining small business concessions, you may apply each of those concessions to different parts of the capital gain.

After applying any capital losses, individuals and trusts eligible for both the CGT discount and the small business 50% active asset reduction can reduce a capital gain by 75% (that is, by 50% then 50% of the remainder).

Discount capital gain

CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997, relating to the disposal of a CGT asset, will happen when you dispose of the property. You will make a capital gain if the capital proceeds from the disposal are more than the cost base. You will make a capital loss of those capital proceeds are less than the reduced cost. 

You will be eligible for the discount capital gains where:

● you are an individual

● the CGT event happened after 21 September 1999

● the capital gain must be calculated without any reference to indexation of the cost base; and

● the CGT asset was acquired more than 12 months before the CGT event.

The discount percentage is 50%.

Where a capital gain meets these requirements, that capital gain is a discount capital gain. Generally, the discount percentage is applied to the discount capital gain, to arrive at your net capital gain.

You will be eligible for the discount capital gain of 50% if your capital gain is calculated without any reference to indexation of the cost base.

Small business 50% reduction

Unlike the other small business concessions, the small business 50% active asset reduction applies automatically if the basic conditions are satisfied, unless you choose for it not to apply.

To apply the small business 50% active asset reduction, you need to satisfy only the basic conditions. There are no further requirements.

In your case, you satisfy the basic conditions and you will be eligible for the small business 50% active asset reduction.

Retirement exemption

You may choose to apply the small business retirement exemption after the CGT discount has been applied and the small business 50% active asset reduction, that is, to the remaining 25% of the capital gain.

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).

If you are 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA.

For an individual choosing the retirement exemption, there is no requirement to terminate any activity or cease their business.

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' or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment.

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.

As discussed above, you satisfy the basic conditions and you are both over 55 years of age. Therefore, providing you have no previous CGT exempt amounts disregarded under the retirement exemption, you will both be able to choose to disregard up to $500,000 each under the retirement exemption by simply keeping a record of the amount you chose to disregard.

Example of applying multiple concessions

Ken is a small business operator who sells an active asset that he has owned for more than 12 months. He makes a capital gain of $2,000,000. Assuming he satisfies all the conditions for the CGT discount and the small business concessions, Ken calculates his net capital gain as follows: