Edited version of private advice

Authorisation Number: 1051960394240

Date of advice: 27 April 2022

Ruling

Subject: CGT - small business concession

Issue 1

Question 1

Do you meet the conditions to apply the small business 15-year exemption under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain made on the disposal of Asset A?

Answer

Yes.

Question 2

Do the capital proceeds from the disposal of Asset A need to be apportioned for the structure constructed and paid for by the lessee?

Answer

No.

Issue 2

Question 1

Do you meet the conditions to apply the small business 15-year exemption under Division 152 of the ITAA 1997 to disregard the capital gain made on the disposal of Asset B?

Answer

Yes.

Question 2

Do the sale proceeds from the disposal of Asset B need to be apportioned for the bottom floor of the building used by the lessee?

Answer

No.

This ruling applies for the following period:

DD/MM/YYYY

The scheme commences on:

DD/MM/YYYY

Relevant facts and circumstances

You are over 55 years of age.

You have significant health issues.

You do not satisfy the $6 million maximum net asset value test.

Asset A

You purchased Asset A after 20 September 1985.

A solicitor drawn lease was put in place between you and The Company as trustee for The Trust.

The Company as trustee for The Trust is a small business entity with an aggregate turnover of less than $2 million.

The business activity is primary production.

You are the sole director of The Company.

You are the appointor and principal beneficiary of The Trust.

The Trust made capital improvements to Asset A by paying for the construction of a hay shed.

Clause 14 of the lease agreement allows The Trust to carry out capital improvements on your approval, where you are required to purchase such capital improvements per their recorded value in the books of the lessee upon termination of the lease.

Asset A has a separate homestead and cottage building attached to the land. The total area covered by these buildings is between quarter and half of an acre.

From XXXX to XXXX, the homestead was occupied by a full-time working manager and his family. Since XXXX, the homestead has been rented out by The Trust to long term tenants.

The cottage was initially used to facilitate your managerial visits.

After approximately X years, the cottage has been rented out by The Trust to long term tenants.

From XXXX to XXXX, the total rental income received for use of the homestead and cottage buildings, and use of Asset A, is significantly less than the business income received from the primary production activity.

The purpose of Asset A is considered to be commercial in nature.

You expect a reduction in work hours (in preparation for retirement) upon the disposal of Asset A.

Asset B

You purchased a two-storey commercial building (Asset B) after 20 September 1985.

The bottom floor of Asset B had an existing lessee with exclusive access to a cold room, storage shed, and 6 parking spaces in the attached carpark.

From MM/YYYY to MM/YYYY, you operated your business from the top floor of Asset B and had exclusive access to two bathrooms and three parking spaces in the attached carpark.

The area of each floor is approximately 80 square metres.

You are a small business entity with a turnover of less than $2 million.

From MM/YYYY, you have carried on your business at home due to the impact of COVID-19.

From XXXX to XXXX, the total rental income received for use of the bottom floor of Asset B is less than the business income received from the business.

The purpose of Asset B is considered to be commercial in nature.

In the XXXX-XX income year, Asset B was sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 subsection 110-25(5)

Income Tax Assessment Act 1997 section 116-40

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-105

Reasons for decision

Issue 1

Question 1

Summary

Having considered your circumstances and the relevant facts, you will satisfy the basic conditions for the small business CGT concessions under Subdivision 152-A of the ITAA 1997 upon disposal of Asset A and can apply the 15-year exemption under section 152-105 of the ITAA 1997.

Detailed reasoning

The small business 15-year exemption takes priority over other small business CGT concession under Division 152 of the ITAA 1997.

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

a)    The basic conditions

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

c)    You are either:

                      i.        55 years of age or over at the time of the CGT event and the event is in connection with your retirement, or

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

Basic conditions

Section 152-10 of the ITAA 1997 contains the basic conditions that must be satisfied to apply the small business CGT concessions. These conditions are:

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

b)    The event would (apart from this Division) have resulted in a 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

                    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 that 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

You do not carry on a business; however, Asset A is used in a business of primary production by a small business entity that is connected with you (The Trust). The Trust has used Asset A for more than 15 years since you have held the property, satisfying the active asset test. As you are the beneficial owner of the property, you will satisfy the basic conditions for the small business CGT concessions under Subdivision 152-A of the ITAA 1997 upon disposal of Asset A.

Regarding the small business CGT concessions, you will meet the additional conditions under section 152-105 of the ITAA 1997 to apply the small business 15-year exemption. This is because you have continuously held the property for more than 15 years, you are over 55 years of age, and you expect a reduction in work hours (in preparation for retirement) upon the disposal of Asset A. As the 15-year exemption allows you to disregard the entire capital gain, no further concessions need be considered.

Question2

Summary

The shed constructed by the Trust will not be considered a separate asset from the land as you cannot apply any of the balancing adjustment provisions. Therefore, you are not required to apportion any of the capital proceeds to the structure under 116-40 of the ITAA 1997.

Detailed reasoning

Section 108-55 of the ITAA 1997 sets out when a building is a separate asset from the land. In accordance with subsection 108-55(1) of the ITAA 1997 a building or structure on land that you acquired on or after 20 September 1985 is taken to be a separate CGT asset from the land if one of these balancing adjustment provisions applies to the building or structure (whether or not there is a balancing adjustment):

a)    Subdivision 40-D; or

b)    Section 355-315 or 355-525 (about R & D)

In this case, the shed constructed by the Trust will not be considered a separate asset from the land as you cannot apply any of the balancing adjustment provisions listed above. Therefore, you are not required to apportion any of the capital proceeds to the structure under 116-40 of the ITAA 1997.

Issue2

Question1

Summary

Having considered your circumstances and the relevant facts, you will satisfy the basic conditions for the small business CGT concessions under Subdivision 152-A of the ITAA 1997 upon disposal of Asset B and can apply the 15-year exemption under section 152-105 of the ITAA 1997.

Detailed reasoning

From MM/YYYY to MM/YYYY, you used Asset B to carry on your business as your principal place of business. As you are the beneficial owner of the property and your aggregate turnover is less than $2 million, you will satisfy the basic conditions for the small business CGT concessions under Subdivision 152-A of the ITAA 1997 upon disposal of Asset B.

Regarding the small business CGT concessions, you will meet the additional conditions under section 152-105 of the ITAA 1997 to apply the small business 15-year exemption. This is because you have continuously held the property for more than 15 years, you are over 55 years of age, and the disposal of your asset is in connection with your retirement. As the 15-year exemption allows you to entirely disregard any capital gain, no further concessions need be considered.

Question2

Asset B satisfies the active asset test meaning the small business CGT concessions can be applied to the proceeds from the entire asset. There is no requirement to apportion the proceeds because part of the property has been leased.