Edited version of private advice

Authorisation Number: 1051778292755

Date of advice: 10 November 2020

Ruling

Subject: CGT - small business concessions

Question 1

Can the Taxpayer (You) utilise the 15-year exemption rule under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) for your 50% interest in the Property originally acquired in 20XX?

Answer

Yes.

Question 2

Can you utilise the CGT retirement exemption under Subdivision 152-D of the ITAA 1997 in respect of the 50% interest in the Property you inherited from your late husband?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The Taxpayer (You) are over 55 years of age.

You and your spouse purchased a farming property (the Property) in 20XX.

You both commenced a farming business in 20XX (the Business). Your spouse passed away on XX XXXX 20XX. Your spouse's half share of the Business and Property was transferred to You via the Will.

You continued to carry on the farming business until Xx XXXX 20XX. You put the Property on the market, pending your retirement. You also commenced selling off the plant and equipment used in the business. The final sale of the equipment took place on 30 June 20XX.

There is a farmhouse on the Property. You and your spouse used the house as accommodation only when working at the farm. You then returned to your main residence at another location. The farmhouse was never used by either of you, or anybody else, as a main residence.

The business with your spouse operated from X XXX 20XX to X XXXX 20XX. A period of 12 years 280 days.

You continued running the business until Xx XXXX 20XX. You therefore carried on your share of the business for 15 years and 273 days.

The Property was sold more than 2 years after the passing of the late spouse.

It is proposed to treat the capital gains transaction as follows:

•         You will apply the 15-year exemption in respect of your 50% interest originally acquired in 20XX.

•         You will apply the CGT retirement exemption in respect of the 50% interest you inherited from your spouse when your spouse passed on X XXXX 20XX.

You have never claimed the CGT retirement exemption before. The amount claimed is less than the $500,000 lifetime limit.

Your turnover for the year ended 30 June 20XX was less than $Xmillion and you qualify as a CGT small business entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 paragraph 152-110(1)(d)

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 section 152-300

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 subsection 152-305(1)

Income Tax Assessment Act 1997 subsection 152-315(1)

Income Tax Assessment Act 1997 paragraph 152-315(2)(a)

Question 1

Summary

You qualify for the small business 15-year exemption in section 152-105 of the ITAA 1997 in relation to the sale of your original 50% share of the Property.

Reasons for decision

Small business 15-year exemption

Section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a small business 15-year exemption for individuals. Under this section, you can disregard the capital gain make on the disposal of a CGT asset if you:

(a)    satisfy the basic conditions for the small business CGT concessions in Subdivision 152-A of the ITAA 1997;

(b)    continuously owned the CGT asset for the 15-year period ending just before the CGT event, and

(c)     are at least 55 years old at the time of the CGT event and the event happens in connection with your retirement or are permanently incapacitated at that time.

The basic conditions contained in Subdivision 152-A of the ITAA 1997 will be satisfied because:

•         a CGT event will occur when you dispose of the Property in May 2020;

•         the event will result in a gain;

•         you are a CGT small business entity for the income year ended 30 June 2020 with turnover under $2 million;

•         the CGT asset satisfies the active asset test as the Property is considered an active asset as it was used in the business of cattle farming. You have owned your 50% original share of 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 period from when you acquired your interest and the day of the CGT event;

•         you have owned your 50% share of the Property for more than 15 years ending just before the CGT event; and

•         you will be at least 55 years old when you dispose of your original 50% of the Property.

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. A CGT event may be 'in connection with your retirement' even if it occurs at some time before or after retirement.

It is considered that there will be a clear link between the disposal of the Property and your retirement. It is considered that the disposal of the Property is integral to your retirement plans as you are over 55 years of age. Accordingly, the CGT event when you dispose of the Property will be considered to happen in connection with your retirement in accordance with paragraph 152-110(1)(d) of the ITAA 1997.

Conclusion on small business 15-year exemption on sale of your original 50% share of the Property

You qualify for the small business 15-year exemption in section 152-105 of the ITAA 1997 in relation to the sale of your original 50% share of the Property.

You can disregard the capital gain you make on the disposal of your original 50% share of the Property.

Question 2

Summary

You are entitled to claim the small business retirement exemption to disregard the capital gain from the CGT event on the sale of your inherited 50% share of the Property.

Reasons for decision

Small Business Retirement Exemption

Subdivision 152-D of the ITAA 1997 provides a small business CGT concession known as the small business retirement exemption. Under section 152-300 of the ITAA 1997 you can choose to disregard a capital gain from a CGT event happening to a CGT asset of your small business if the capital proceeds from the event are used in connection with your retirement.

If you are an individual under subsection 152-305(1) of the ITAA 1997 you can choose to disregard all or part of a capital gains if:

(a)  the basic conditions in subdivision 152-A of the ITAA 1997 are satisfied for the gain;

The other subsections of 152-305 of the ITAA 1997 will not apply as you are over 55 years of age.

Under subsection 152-315(1) of the ITAA 1997 you can choose to disregard all or part of each capital gain to which this subdivision applies. The amount chosen for the asset is its CGT exempt amount. The CGT exempt amount for individuals may be any amount relating to a capital gain provided the CGT retirement exemption limit is not exceeded (paragraph 152-315(2)(a) of the ITAA 1997).

An individual's CGT retirement exemption limit is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual under subdivision 152-D of the ITAA 1997.

Application to your circumstances

You are now a sole trader over the age of 55 years, and you intend to claim the retirement exemption for the inherited 50% share of the Property as you have reached retirement age. We have already established that the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied in regard to the sale of the Property.

The disposal of your inherited 50% of the Property asset will trigger CGT event A1 and the timing of the event will be when the contract for the disposal is entered into.

As you acquired the inherited 50% of the Property after 30 September 1999 indexation of the cost base is not available to you, however, you are eligible for the 50% CGT discount. The CGT discount must be applied to the gain before applying any of the small business concessions.

You satisfy the CGT small business entity test as you were carrying on a business with an aggregated turnover of less than $X million.

You satisfy the active asset test as you acquired your 50% share on the death of your late husband and have continued to use the Property in your farming business from that date in 20XX. The active asset test will be satisfied as this test requires the CGT asset to be an active asset for at least half the period of ownership if owned for 15 years or less.

As you have satisfied all the basic conditions you may apply the 50% active asset reduction. This means that you may reduce the capital gain by a further 50%, effectively reducing the gain by 75% (that is, 50% then 50% of the remainder).

Conclusion on Small business Retirement Exemption

As you meet the basic conditions and as the amount you are choosing to exempt does not exceed your lifetime retirement exemption limit you are able to apply the retirement exemption to the remaining gain (exempt amount). You are over 55 years of age, so you do not have to contribute an amount equal to the exempt amount into a complying superannuation fund.