Edited version of private advice

Authorisation Number: 1051995907631

Date of advice: 23 June 2022

Ruling

Subject: CGT - small business 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 on the disposal of your property?

Answer

Yes.

Question 2

Is the disposal of the property considered to be 'in connection with your retirement' for the purposes of section 152-10 of the ITAA 1997 to apply the 15-year exemption?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You acquired a property in 199A.

You are a sole trader.

You have operated a business activity at the property continuously since 199B.

The property is an active asset.

Your aggregated turnover was less than $X million in the 20XX income year.

You signed a contract to sell the property in the 20XX income year.

You are over the age of 55.

You began your transition to retirement in the 20XX income year.

You retired from your long-term employment in the 20XX income year.

Once the contract settlement period has ended and the sale of the property is finalised, you will cease operating your business activity.

In the 20CC income year, you commenced operating a separate business activity at another location with the intention of the activity to provide you with a small income throughout your retirement.

Your retirement transitions will reduce your weekly working hours considerably.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 section 152-10

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

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 108-5(1)

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

Income Tax Assessment Act 1997 paragraph 104-10(3)(a)

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

Income Tax Assessment Act 1997 section 104-10(4)

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

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

Income Tax Assessment Act 1997 subsection 328-110(1)

Income Tax Assessment Act 1997 subsection 995-1(1)

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

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

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 152-10(1)(d)

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 paragraph 152-105(b)

Reasons for decision

Question 1

Summary

You satisfy the basic conditions of relief as outlined in subsection 152-10(1) of the ITAA 1997 in relation to the disposal of your property.

Detailed reasoning

Division 152 of the ITAA 1997 allows you to reduce or disregard a capital gain from a CGT event under the small business concessions. To qualify for the small business CGT concessions, several basic conditions outlined in Subdivision 152-A must first be satisfied.

The basic conditions for relief under the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997. These conditions are:

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

(b)    The event would (apart from this division) have resulted in the gain;

(c)    At least one of the following applied:

(i)         You are a CGT 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 CGT small business entity for the income year and the

(iv)       CGT asset is an interest in an asset of the partnership;

(v)        The conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in

(vi)       the income year;

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

Each of the requirements will be discussed below.

Basic condition (a) - A CGT event happens in relation to a CGT asset of yours in an income year.

As per subsection 108-5(1) of the ITAA 1997, a CGT asset is defined as any kind of property, or a legal or equitable right that is not property. Your property is a CGT asset.

Subsection 104-10(1) of the ITAA 1997 details that a CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity. Paragraph 104-10(3)(a) of the ITAA 1997 provides that the timing of the CGT event is when you enter into the contract for the disposal. You entered into a contract to dispose of the property in the 2022 income year, consequently a CGT event has occurred.

Therefore, you have met the basic condition as outlined in paragraph 152-10(1)(a) of the ITAA 1997.

Basic condition (b) - The event would have resulted in the gain.

Subsection 104-10(4) of the ITAA 1997 outlines that you make a capital gain from a CGT event if the capital proceeds from the disposal are more than the asset's cost base.

You have advised that you are incurring a capital gain on the disposal of your property. Therefore, you have met the basic condition as outlined in paragraph 152-10(1)(b) of the ITAA 1997.

Basic condition (c) - At least one of the following applies:

(i) You are a CGT small business entity for the income year.

Subsection 152-10(1AA) of the ITAA 1997 defines that you are a CGT small business entity for an income years if:

(a)  You are a small business entity for the income year; and

(b)  You would be a small business entity for the income year if each reference in section 328-110 to $10

(c)   million were a reference to $2 million.

Subsection 328-110(1) of the ITAA 1997 outlines that you are small business entity for an income year if:

(a)  You carry on a business in the current year; and

(b)  One or both of the following applies:

            (i)    You carried on a business in the income year before the current year and your aggregated

           (ii)    turnover for the previous year was less than $10 million;

          (iii)    You aggregated turnover for the current year is likely to be less than $10 million.

The term 'business' is defined in subsection 995-1(1) of the ITAA 1997 to include any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

In your circumstances, you are operating as a sole trader engaged in multiple business activities. You have advised that your aggregated annual turnover is below $2 million.

Therefore, you have met subparagraph 152-10(1)(c)(i) of the ITAA 1997. Consequently, the basic condition as outlined in paragraph 152-10(1)(c) of the ITAA 1997 has been met as only one subparagraph needs to be satisfied, and as such the other subparagraphs will not be considered.

Basic condition (d) - The CGT asset satisfied the active asset test

As per paragraph 152-35(1)(b) of the ITAA 1997 a CGT asset satisfies the active asset test if 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).

Subsection 152-35(2) of the ITAA 1997 details that the test period begins when you acquired the asset and ends at the timing of the CGT event.

Subsection 152-40(1) provides that a tangible or intangible CGT asset is an active asst if you own the asset, and it is used or held ready for use in a business carried on by you, your affiliate, or an entity connected with you.

In your circumstances, you have owned the property continuously since 199A which is more than 15 years. You have also operated a business at the property since 199B, which exceeds the 7½ years requirement. Therefore, the property satisfied the active asset test as outlined in section 152-35 of the ITAA 1997.

Therefore, you have satisfied the basic condition as outlined in paragraph 152-10(1)(d) of the ITAA 1997.

Consequently, you have met all the basic conditions of relief as outlined in subsection 152-10(1) of the ITAA 1997 in relation to the disposal of your property.

Question 2

Summary

The disposal of the property is considered to be 'in connection with your retirement' for the purposes of section 152-105 of the ITAA 1997. Therefore, you satisfy the requirements to apply the 15-year exemption upon the disposal of the property.

Detailed Reasoning

Section 152-105 of the ITAA 1997 details that an individual can disregard a capital gain arising from a CGT event if the following conditions are satisfied:

(a)  The basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain;

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

(c)   If the CGT asset is a share in a company or an interest in a trust - the company or trust had a significant individual for at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset;

(d)  Either:

               (i)    You are 55 or over at the time of the CGT event and the event happens in connection with your

              (ii)     retirement, or

             (iii)    You are permanently incapacitated at the time of the CGT event.

Each of the requirements will be discussed below.

(a)  The basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain

As outlined in question one above, you have satisfied the basic conditions provided in Subdivision 152-A of the ITAA 1997.

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

You have held the asset continuously for more than 15 years prior to the disposal of the property. Therefore, you satisfy paragraph 152-105(b) of the ITAA 1997.

(c)  If the CGT asset is a share in a company or an interest in a trust

The CGT asset is a property, and therefore paragraph 152-105(c) of the ITAA 1997 is not applicable to your circumstances.

(d)  Either:

(i) You are 55 or over at the time of the CGT event and the event happens in connection with your retirement, or

(ii) You are permanently incapacitated at the time of the CGT event.

In your circumstances you were over the age of 55 at the time of the CGT event. However, it is necessary to establish that the disposal of the property was in connection with your retirement.

The Guide to Capital Gains Tax Concessions for Small Business provides the following guidance on the 15-year exemption and the meaning of '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 hours worked or a significant change in the nature of their present activities to be regarded as retirement. However, it isn't necessary for there to be a permanent and everlasting retirement from the workforce.

In your circumstances, you have reduced your weekly working hours by approximately 60 hours, you are not wanting to continue a physically demanding activity due to your age, and you have taken additional steps to retire from your long-term employment in the same income year as the disposal of the property. Whilst you will be ceasing one of your business activities, you will continue operating another business activity. Continuing with the business activity will not affect the disposal of the property being in connection with your retirement as the business commenced as a means to support yourself through retirement and it is not a full-time operation.

Therefore, it is reasonable to conclude that the disposal of the property is 'in connection with your retirement'. Consequently, you will satisfy the requirements of section 152-105 of the ITAA 1997 and you are eligible to apply the 15-year retirement exemption upon the disposal of the property.