Edited version of private advice

Authorisation Number: 1051992638915

Date of advice: 9 June 2022

Ruling

Subject: CGT - small business rollover

Question 1

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

Answer

Yes.

Question 2

Do you satisfy the conditions under section 152-410 of the ITAA 1997 to choose to apply the small business rollover?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Family Trust carries on a business.

Person A and Person B are the Trustees for the Family Trust (you).

You have an aggregated turnover of less than $X million.

Property A

You acquired property A after 20 September 1985.

Property A has been used in your business since acquisition.

Property B

You acquired property B after 20 September 1985.

Property B will be used in your business.

Property C

Person A acquired property C after 20 September 1985

Property C has been used in your business since acquisition.

You intend to dispose of property A which will result in a capital gain.

You intend to make capital improvements on property B and property C with the proceeds from the disposal of property A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subsection 152-35(1)

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

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

Income Tax Assessment Act 1997 section 152-410

Income Tax Assessment Act 1997 subsection 104-190(1A)

Income Tax Assessment Act 1997 subsection 104-197(1)

Income Tax Assessment Act 1997 subsection 104-197(2)

Income Tax Assessment Act 1997 section 104-198

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-E

Reasons for decision

Basic conditions

To qualify for the CGT small business concessions, you must satisfy several conditions that are common to all the concessions.

Section 152-10 of the Income tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for 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 have 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.

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

Active asset

Subsection 152-35(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a CGT asset satisfies the active asset test if:

•         you have 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 of ownership, or

•         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 7 and a half years.

The test period begins when you acquired the asset and ends at the time of the CGT event (subsection 152-35(2) of the ITAA 1997).

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate or another entity that is connected with you.

You intend to dispose of property A at which time, CGT event A1 will trigger, which will result in a capital gain, satisfying the first two basic conditions. You are carrying on a business and your turnover is less than $X million, therefore you are considered a small business entity, satisfying the third basic condition.

You have held the property A for less than 15 years and the property has been used in the course of carrying on your business since acquisition, therefore satisfying the fourth basic condition.

As all the basic conditions have been satisfied you are eligible to apply the small business concessions.

Small business rollover

Section 152-410 of the ITAA 1997 provides that you can choose to obtain a rollover under Subdivision 152-E of the ITAA 1997 for a capital gain if the basic conditions in Subdivision 152-A are satisfied for the gain.

As you have satisfied the basic conditions to apply the CGT small business concessions under section 152-10 of the ITAA 1997 you are eligible to choose to apply the small business rollover.

Further issues for you to consider

Further CGT events happen if you have chosen the small business rollover and certain conditions are not met by the end of the asset replacement period. This period starts one year before and ends two years after the CGT event (subsection 104-190(1A) of the ITAA 1997).

A capital gain will arise if you do not acquire one or more CGT assets as replacement assets or make a capital improvement to one or more of your existing assets, or both, within the replacement asset period (CGT event J5, subsection 104-197(1) of the ITAA 1997). The replacement asset must be your active asset (subsection 104-197(2) of the ITAA 1997).

CGT event J6 happens if you choose the rollover and by the end of the replacement asset period you acquired a replacement asset or made a capital improvement to your existing assets, however you have not expended the full amount of the capital gain disregarded under the small business rollover on the replacement assets (section 104-198 of the ITAA 1997).

The replacement asset must be your asset. Any capital improvement (also a replacement asset) must be to made to one of your existing assets. In your case, you intend to undertake capital improvements to property B and property C, however the property C is owned by Person A and therefore not your asset (although used in your business). Any expenditure on capital improvements to the property C will not be considered your replacement asset.