Edited version of private advice

Authorisation Number: 1051922202398

Date of advice: 15 November 2021

Ruling

Subject: CGT - small business concessions - 15 year exemption

Question

Do you satisfy the conditions under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply the CGT small business 15 year exemption to any capital gain made from the disposal of the land holdings?

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

You acquired X acres under various land holdings (land holdings) after 20 September 1985.

The land holdings were used in a business conducted by a connected family trust from acquisition until March 20XX.

The land holdings are currently leased by the family trust under a commercial agreement to an unrelated third party.

You intend to transfer the land holding to your self-managed superannuation fund (SMSF).

The SMSF will then lease the land holdings to unrelated third parties providing income for your retirement.

You worked full time for an employer.

You ceased employment with the employer on XX XXXX 20XX.

While working for the employer you started to develop a product to be sold to a specific industry.

You established two companies, Company A and Company B to undertake the development and sale of the product.

You are the director and shareholder of both Company A and Company B.

After ceasing employment with your employer, you focussed on the development of the product, working full time hours on this activity.

A Distribution Agreement with an unrelated third party for the marketing and sale of the product has recently been entered into.

As a result of entering the Distribution Agreement, you have been able to significantly reduce your hours working in Company A and Company B.

You are over 55 years of age.

You satisfy the maximum net asset value test.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-105

Reasons for decision

A capital gain that you make may be reduced or disregarded under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) if the following basic conditions contained in section 152-10 of the ITAA 1997 are satisfied:

(a)             A CGT event happens in relation to a CGT asset of yours in an income year,

(b)             The event would have resulted in a gain,

(c)             The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

(d)             At least one of the following applies:

•                 you are a small business entity for the income year,

•                 you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997,

•                 you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

•                 you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

To be eligible to apply the CGT small business concessions an entity must satisfy all four of the basic conditions above.

In your case, there will be a CGT event upon transfer of the land holdings to the SMSF which will result in a capital gain. The land holdings satisfy the active asset test as you have held the land holdings for more than 15 years and the land holdings have been used in the business carried on by the family trust (which is a connected entity to you) for more than 7.5 years. As you also satisfy the maximum net asset value test, you satisfy the basic conditions to apply the CGT small business concessions.

Section 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if all the following conditions are satisfied:

(a)             you satisfy the basic conditions

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

(c)             you are either:

                                     i.                    55 or over at the time of the CGT event and the event happens in connection with your retirement; or

                                   ii.                    permanently incapacitated at the time of the CGT event.

In your case, you have satisfied the basic conditions and you have held the land holdings for more than 15 years.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case.

After entering into the Distribution Agreement for the marketing and sale of the product developed, you have been able to significantly reduce the number of hours worked in Company A and Company B. The reduction in hours and the transfer of the land holdings to your SMSF are steps you are taking toward retirement. You are over 55 years and the transfer of the land holdings to your SMSF is considered to be in connection with your retirement. As such, you have satisfied the additional conditions required to apply the small business 15 year exemption to disregard any capital gain made from the transfer of the land holdings.