Edited version of private advice

Authorisation Number: 1051927124415

Date of advice: 16 December 2021

Ruling

Subject: Small business CGT concessions

Question 1

Do you satisfy the conditions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply the small business capital gains tax (CGT) concessions to the disposal of the farm?

Answer

Yes.

Question 2

Is the disposal of the farm considered to be "in connection with your retirement" for the purposes of section 152-105 of the ITAA 1997 to apply the small business 15-year exemption?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your now ex-spouse acquired a property (the property) after 20 September 1985, in partnership with each of you holding a 50% interest.

The property was used by the partnership to carry on a business from December 19XX to 20XX.

In 20XX the partnership ceased to operate the business and the property was leased to an unrelated third party with the partnership receiving rental income.

You reduced your working hours from 60 hours per week to nil.

The property was sold in July 20XX.

Shortly after the sale of the farm, you acquired a new property (new property).

After acquisition of the new property, you increased your working hours from nil to approximately 30 hours per week conducting a business on the new property.

You are over the age of 55.

You do not have any related entities, connected entities or affiliates.

The partnership's aggregated turnover for the 20XX financial year is less than $XXX.

Your expected aggregated turnover for the 20XX financial year is less than $XXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-105

Income Tax Assessment Act 1997 Section 152-300

Income Tax Assessment Act 1997 Section 152-320

Reasons for decision

Detailed reasoning

Question 1

Basic conditions

Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions that must be satisfied to be eligible to apply the capital gains tax (CGT) small business concessions. These conditions are:

(a) a CGT event happens in relation to a CGT asset in an income year.

(b) the event resulted in the gain.

(c) at least one of the following applies:

(i) you are a small business entity for the income year

(ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or

(iv) 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.

(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Application to your circumstances

A CGT event occurred when you sold the property resulting in a gain.

You are a partner in a partnership that was a small business entity in the 20XX-XX financial year and the property was an asset of the partnership. The partnership carried on a primary production business on the property for more than 7.5 years out of the more than 15 years the property was held, therefore satisfying the active asset test. Although the property was being used to receive passive income for the last X years, there is no requirement that the property be an active asset immediately prior to disposal. As such, the basic conditions under section 152-10 of the ITAA 1997 have been satisfied.

Question 2

15-year exemption

Section 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain you make if you meet the requirements of the following conditions:

(a) you satisfy the basic conditions

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

(d) when the CGT event happened:

(i) you were 55 years old or over and

(ii) the event happened in connection with your retirement.

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. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as retirement.

The Explanatory Memorandum (EM) to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession:

1.68 One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement.

The provisions relating to the small business 15-year exemption does not define what is meant by the phrase 'in connection with a taxpayer's retirement', nor does it give any indication of the degree of retirement required to take advantage of this concession.

It could be argued that the phrase 'in connection with retirement' means that the capital gain arising from the disposal of an active assets is to be used to provide funds for a person's retirement rather than to precipitate retirement at the time of the CGT event. The words used in the EM support this interpretation.

The guide to the Capital gains tax concessions for small business also supports this view. It makes it clear that it is not necessary for there to be a permanent and everlasting retirement from the workforce. However, there needs to be at least a significant reduction in the number of hours worked, or a significant change in the nature of the activities, to be regarded as 'in connection with your retirement' for the purposes of paragraph 152-105(1)(d) of the ITAA 1997.

Whether a particular case satisfies the conditions depends very much on the facts of each case.

Application to your circumstances

In your case, The partnership ceased to conduct a business in 20XX and leased the property to an unrelated third party. At that point in time, there was a significant change in both the nature of your present activities and number of hours worked, not X years later in 20XX when the property was sold.

Paragraph 152-105(d) of the ITAA 1997 requires that the CGT event happened in connection with your retirement. It is considered that you retired in 20XX when you significantly reduced your working hours from approximately XX hours per week to nil and ceased business activity. Therefore, the disposal of the property in 20XX is not considered to be in connection with your retirement. As such, you do not satisfy the conditions to apply the CGT small business concessions 15-year exemption.

Further information for you to consider

Retirement Exemption

Section 152-300 of the ITAA 1997 contains the small business retirement exemption. As an individual, you may choose to disregard all or part of a capital gain under the small business retirement exemption if:

•         you satisfy the basic conditions,

•         you keep a written record of the amount you chose to disregard.

There is no requirement to make a contribution to your superannuation fund if the individual is over 55 years of age, however, the amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit. Under section 152-320 of the ITAA 1997, 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.