Edited version of private advice

Authorisation Number: 1052001054439

Date of advice: 4 July 2022

Ruling

Subject: Capital gains tax small business concessions

Question

Are you entitled to use the small business 15 year exemption to disregard any capital gain made from the sale of two properties?

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

1.            You run a farming business in partnership with your spouse.

2.            You are XX years of age and your spouse is XX years of age and have decided to downsize the farming business in preparation for retirement.

3.            The partnership ran approximately XXX animals over three properties owned by you and your spouse.

4.            You and your spouse have kept one property and are preparing it for sale, but the other two properties have been sold to an unrelated third party.

5.            The two properties sold were acquired more than 15 years ago and have always been used in your farming business.

6.            Both properties were sold by contract on XX/XX/XXXX.

7.            In conjunction with selling the properties you have reduced the amount of animals leaving you approximately XXX animals. As you have no breeding males the amount of the animals cannot increase naturally.

8.            The reduction in farming properties and animals has meant that you have reduced the hours that you work in the farming business from approximately 50 - 60 hours a week to 10 - 15 hours a week.

9.            You hope as part of your retirement plan to sell the remaining property and animals in the foreseeable future depending on the market conditions.

10.          You have advised that you are a small business entity as your turnover is less than $2 million.

11.          You advised that you and your spouse are not connected to or are affiliates of any other entity.

12.          You have not claimed small business concessions previously.

Information provided

13.          You have provided the following documents in relation to the ruling request:

(a)          your private ruling application, and

(b)          supplementary information provided via email.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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

Income Tax Assessment Act 1997 subsection 104-10(3)

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

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

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

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

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

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

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 subsection 152-105(1)

Income Tax Assessment Act 1997 subparagraph 152-105(1)(d)(i)

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

Income Tax Assessment Act 1997 subsection 328-115(1)

Income Tax Assessment Act 1997 subsection 328-120(1)

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 subsection 328-125(1)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Are you entitled to use the small business 15 year exemption to disregard any capital gain made from the sale of two properties?

Summary

You can disregard any capital gain made from the sale of the two properties, as you have satisfied the conditions to use the small business 15-year exemption.

Detailed reasoning

Eligibility for small business relief

1.             An entity may choose to apply the small business relief set out in Division 152 to reduce or disregard a capital gain if the basic conditions set out in Subdivision 152-A are satisfied.

2.             Subsection 152-10(1) provides the basic conditions as follows:

(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 applies:

                                                  i.            you are a *CGT small business entity for the income year;

                                                 ii.            you satisfy the maximum net asset value test (see section 152-15);

                                                iii.            you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

                                               iv.            the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

(d)          the CGT asset satisfies the active asset test (see section 152-35)

Disposal of property - time of CGT event A1

3.             CGT event A1 happens if you dispose of a CGT asset.[1] The event happens when you enter into the contract for disposal, or if there is no contract when the change of ownership occurs.[2]

4.             You and your spouse entered into two contracts for sale, dated XX/XX/XXXX. CGT event A1 happened when you entered into the sale contract. You will make a capital gain in the income year the sale contract is entered into.

CGT small business entity

5.             You are a 'CGT small business entity' for an income year if:[3]

(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 million were a reference to $2 million.

6.             You are a 'small business entity' for an income year (the current year) if: [4]

(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 (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million, and

                                                 ii.            your aggregated turnover for the current year is likely to be less than $10 million

7.             You and your spouse have been running a farming business since the XXXX's.

8.             Your 'aggregated turnover' for an income year is the sum of the relevant annual turnovers.[5] The 'relevant annual turnovers' are your annual turnover for the income year plus the annual turnovers of any connected or affiliated entities of yours during the income year. An entity's aggregated turnover is the same as its annual turnover if there are no other entities connected with or affiliated with it.

9.             Section 328-125 provides 'control' tests which govern when an entity will be deemed to be 'connected with' another entity.

10.          Subsection 328-125(1) states:

An entity is connected with another entity if:

(a) either entity controls the other in a way described in this section; or

(b) both entities are controlled in a way described in this section by the same third entity.

11.          You have advised that neither yourself or your spouse control or are affiliates with any other entity.

12.          The relevant annual turnover for your partnership consists of:

(a)          the partnerships annual turnover

(b)          your annual turnover, and

(c)           your spouse's annual turnover.

13.          An entity's 'annual turnover' for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.[6]

14.          'Ordinary income' is defined in section 6-5 as income according to ordinary concepts. An entity's annual turnover therefore includes all income according to ordinary concepts derived in the ordinary course of carrying on a business.

15.          You have stated that you and your spouse do not carry on a business outside the partnership, therefore both of your individual annual turnovers would be zero.

16.          The partnership's annual turnover for the 20XX-XX income year is $XXX.

17.          You have also stated that the partnership's annual turnover will be less than $2 million for the 20XX-XX income year.

18.          The partnership will therefore satisfy the definition of a CGT small business entity in subparagraph 152-10(1)(c)(i).

Active asset test

19.          The final basic condition requires the CGT asset to satisfy the active asset test.

20.          A CGT asset is an active asset at a given time if, at that time:[7]

(a)          you own the asset (whether tangible or intangible) and it is used, or held ready for use in the course of carrying on a business (whether alone or in partnership) by:

                                                  i.            you; or

                                                 ii.            your *affiliate; or

                                                iii.            another entity *connected with you; or ....

21.          A CGT asset satisfies the active asset test if:[8]

(a) 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 specified in subsection (2); or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total for at least 7.5 years during the period specified in subsection (2).

22.          You and your spouse have owned the two properties for more than 15 years. These properties have always been used in your farming business since this time. As the properties were used in the course of carrying on the farming business the properties are active assets. As the partnership has owned the active asset for more than 15 years and it was used as an active asset for at least 7.5 years, the partnership will satisfy the active asset test.

Conclusion on satisfying the basic conditions

23.          Based on the facts provided, the basic conditions for relief have all been satisfied.

Small business 15-year exemption

24.          Subdivision 152-B contains the small business 15-year exemption that allows a small business to disregard a capital gain arising from a CGT asset that it has owned for at least 15 years.

25.          Subsection 152-105 sets out the following conditions that individuals must satisfy before claiming the small business 15-year exemption:

If you are an individual, you can disregard any *capital gain arising from a *CGT event if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain

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

Note: Section 152-115 allows for continuation of the period if there is an involuntary disposal of the asset.

(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 a total of 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) if 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 that time of the CGT event.

26.          Where all of these conditions are satisfied, the entity can disregard any capital gain arising from the CGT event.

27.          It has already been established that you and your spouse have satisfied the basic conditions in Subdivision 152-A for the capital gain made from the sale of the two properties.

28.          As you and your spouse have owned both properties for more than 15 years, the second requirement is satisfied.

29.          The third requirement relates if the CGT asset is a share in a company or trust, however since the CGT assets is property this requirement is not applicable.

30.          At the time the contract was entered into, you were XX and your spouse was XX years of age. Therefore, you were both over 55 when the CGT event happened.

31.          Whether a CGT event happens 'in connection with an individual's retirement' depends on the particular circumstances of each case. In this regard, 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 a retirement. A CGT event may be 'in connection with your retirement' even if it occurs at some time before, or after, retirement. However, it isn't necessary for there to be a permanent and everlasting retirement from the workforce.[9]

32.          You have stated that since the two properties have been sold, both you and your spouse have reduced your hours working the farming business from 50 - 60 hours per week to 10 - 15 hours per week and are planning to sell the remaining animals over the next year to two years resulting in the cessation of the farming business.

33.          Since the sale of the two properties, the time that you and your spouse spend in the business has dramatically decreased, it is considered that the CGT event happened in connection with your and your spouse's retirement.

34.          As you and your spouse are over 55 at the time of the CGT event and this event happened in connection with their retirement, the final requirement is subparagraph 152-105(1)(d)(1) will be satisfied.

35.          Based on the information provided, you and your spouse satisfy all the conditions in subsection 152-105(1) and are entitled to claim the small business 15 year exemption to disregard the capital gain made from the sale of the two properties.

[1]Subsection 104-10(1)

[2]Subsection 104-10(3)

[3]Subsection 152-10(1AA)

[4]Subsection 328-110(1)

[5]Subsection 328-115(1)

[6]Subsection 328-120(1)

[7]Subsection 152-40(1)

[8]Subsection 152-35(1)

[9]Refer to the Guide to Capital Gains Tax 2021