Edited version of private advice

Authorisation Number: 1051788524642

Date of advice: 8 December 2020

Ruling

Subject: CGT small business relief

Question 1

Can Taxpayer 1 and Taxpayer 2 (T1 and T2) apply the small business 50% reduction contained in section 152-205 of the Income Tax Assessment Act 1997 (ITAA 1997) to reduce their share of the capital gain made by 50% if they dispose of the property?

Answer

Yes

Question 2

Can T1 and T2 apply the small business retirement exemption contained in section 152-305 of the ITAA 1997 to disregard their share of the remaining net capital gain made on the disposal of the property?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

T1 and T2 acquired a farm (the property) in 19XX as joint tenants for $XXX,XXX.

T1 and T2 carried on a farming business on the property until 30 June 20XX via a partnership. From 1 July 20XX to the present time, the farming business ceased to be carried on and the partnership only received agistment income of $XXX per annum.

The partners wish to dispose of the property to a third party who will continue to use the property for agistment.

The partners intend to dispose the property for a market value of $XXX,XXX. All costs associated with the disposal of the property will be paid by the third party.

The capital gain to be made from the disposal of the property is expected to be $XXX,XXX.

T1 and T2 are both are over 55 years of age. Neither of them holds any ownership interest or control of any companies or trusts.

Neither T1 nor T2 have previously disregarded any capital gains made against the lifetime limit of $500,000 under the Small business retirement exemption contained in Subdivision 152-D of the ITAA 1997.

T1 and T2 have advised that they have net assets of less than $XXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 102-5(1)

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 paragraph 152-10(1)(a)

Income Tax Assessment Act 1997 paragraph 152-10(1)(b)

Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(ii)

Income Tax Assessment Act 1997 paragraph 152-10(1)(d)

Income Tax Assessment Act 1997 subsection 152-10(2)

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 paragraph 152-35(1)(a)

Income Tax Assessment Act 1997 paragraph 152-35(1)(b)

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 section 152-205

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 paragraph 152-305(1)(a)

Income Tax Assessment Act 1997 subsection 152-320(1)

Income Tax Assessment Act 1997 paragraph 328-110(1)(a)

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Can Taxpayer 1 and Taxpayer 2 (T1 and T2) apply the small business 50% reduction contained in section 152-205 of the Income Tax Assessment Act 1997 (ITAA 1997) to reduce their share of the capital gain made by 50% if they dispose of the property?

Summary

T1 and T2 have satisfied the basic conditions for relief in Subdivision 152-A. Therefore, they can choose to apply the small business 50% reduction to reduce the net capital gain made on the sale of the property.

Detailed reasoning

There are four small business concessions available under Division 152 that allow a small business taxpayer to reduce or disregard a capital gain made on the sale of a CGT asset.

To qualify for any of the concessions, a taxpayer must first satisfy the 'basic conditions' in Subdivision 152-A which are common to all the concessions.

Basic conditions for relief

The basic conditions for relief are set out in subsection 152-10(1), as follows:

(a)          a CGT event (other than CGT event K7) happens in relation to a CGT asset of the small business taxpayer in an income year (the Test Year)

(b)          the CGT event will result in a capital gain

(c)           at least one of the following applies:

(i)            the taxpayer qualifies as a small business entity in the Test Year

(ii)           if the taxpayer is a partner in a partnership, the partnership is a small business entity and the CGT asset is an asset of the partnership

(iii)          the taxpayer satisfies the maximum net asset value test, or

(iv)          if the taxpayer does not carry on business (other than as a partner) the CGT asset must be used in a business carried on by a small business entity that is an affiliate of, or an entity connected with, the taxpayer.

(d)          the CGT asset satisfies the active asset test.

CGT event giving rise to a capital gain

The property is a CGT asset which T1 and T2 acquired in May 1989 for $XXX,XXX. CGT event A1 in subsection 104-10(1) will happen if T1 and T2 dispose of the property to a third party.

T1 and T2 are proposing to sell the property for a market value of $XXX. The third party will pay for all costs associated with the selling of the property. T1 and T2 are expecting to make a capital gain of approximately $XXX,XXX from the sale of the property.

Therefore, the first two basic conditions in paragraphs 152-10(1)(a) and (b) will be satisfied.

Small business entity

After acquiring the property in May 19XX, T1 and T2 carried on a farming business via a partnership. The farming business ceased in 20XX and since that time the partnership has only used the property to derive agistment income.

Agistment income is generally not considered to be receipts from carrying on business where the property is solely used for agistment.[1] Therefore, the partners would not fall within the meaning of a 'small business entity' in paragraph 328-110(1)(a).

Maximum net asset value test

A taxpayer satisfies the maximum net asset value test set out in section 152-15 if the total net value of the CGT assets owned by the taxpayer and any entities that are connected or affiliated (and entities connected with the taxpayer's affiliates), is less than $6 million just before the CGT event.

The rules for determining if an entity is connected with, or is an affiliate of a taxpayer, is outlined in section 328-125 and 328-130 respectively. Neither T1 nor T2 holds any ownership interest or have control of any other entities.

Based on the information provided by T1 and T2, it is accepted that the sum of the net asset values immediately before the sale of the property is less than $6 million. Therefore, T1 and T2 will satisfy the maximum net asset value test in the income year in which they plan to dispose of the property to the third party, resulting in the third basic condition in subparagraph 152-10(1)(c)(ii) being satisfied.

Active asset test

Section 152-35 states:

(1)          A CGT asset will satisfy the active asset test if:

(a)          you 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 specified in subsection (2); 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 7½ years during the period specified in subsection (2).

(2)  The period:

(a)          begins when you acquired the asset; and

(b)          ends at the earlier of:

(i)            the CGT event; and

(ii)           if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business

Subsection 152-40(1) states:

A CGT asset is an active asset at a time if, at that time:

(a)          you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i)            the taxpayer;

(ii)           the taxpayer's small business affiliate; or

(iii)          another small business entity that is connected with your; or ...

The CGT asset does not need to be an active asset just before the CGT event. However, if the CGT asset is of a kind listed in subsection 152-40(4), the CGT asset cannot be an active asset.

T1 and T2 have jointly owned the property for XX years. After acquiring the property in 19XX, T1 and T2 carried on a farming business on the property that ceased in 20XX. The property was used as a farming business for XX years. As the property has been owned for more than 15 years and was an active asset of the partnership for at least 7.5 years, the active asset test in paragraph 152-35(1)(b) will be satisfied.

The final basic condition in paragraph 152-10(1)(d) will therefore be satisfied.

Based on the above, T1 and T2 will satisfy all the basic conditions for relief.

Small business 50% reduction

To qualify for the small business 50% reduction concession in section 152-205 only requires the basic conditions in Subdivision 152-A to be satisfied. There are no further specific conditions that need to be satisfied for this concession to be claimed. Therefore, T1 and T2 can choose to apply the small business 50% reduction concession to reduce the capital gain that will be made from the sale of the property.

Question 2

Can T1 and T2 apply the small business retirement exemption contained in section 152-305 of the ITAA 1997 to disregard their share of the remaining net capital gain made on the disposal of the property?

Summary

T1 and T2 can choose to apply the small business retirement exemption to disregard the remaining net capital gain that will be made from the sale of the property.

Detailed reasoning

The small business retirement exemption is one of the four small business concessions available under Division 152 and allows an individual who is over the age of 55 years to choose to disregard all or part of a capital gain if the basic conditions in Subdivision 152-A are satisfied for the gain.[2]

There is a lifetime limit of $500,000 in respect of any one individual. This limit is reduced by any previous amounts disregarded under the small business retirement exemption.[3]

As set out in Question 1, both T1 and T2 will meet all the basic conditions for relief. You have stated that both T1 and T2 are over 55 years of age and have not previously made any claims for capital gains relief under the small business retirement exemption. Therefore, both individuals can choose to disregard all of the remaining net capital gain from the sale of the property under the small business retirement exemption.

[1] IT 225 - Primary Production - agistment income.

[2] Paragraph 152-305(1)(a)

[3] Subsection 152-320(1)