Edited version of private advice

Authorisation Number: 1052011912526

Date of advice: 12 September 2022

Ruling

Subject: Capital gains tax - 15 year exemption

Question 1

Will you and your spouse satisfy the basic conditions under section 152-10 of Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will you and your spouse satisfy the requirements of section 152-105 of the ITAA 1997 to disregard the capital gain under the small business 15-year exemption?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commences on:

1 July 2021

Relevant facts and circumstances

Person AB (AB) and Person CD (CD) are spouses.

AB and CD are over 55 years of age.

In the 2000 income year, AB and CD purchased X acres of vacant land (the Property).

AB and CD built a house on X acres of the Property to use as their Main Residence.

In the 2008 income year, AB and CD established a Company XYZ Pty Ltd trading as XYZ (XYZ).

AB and CD are equal shareholders of ZYZ.

XYZ utilised X acres of the remaining acres to store materials and business equipment.

In March 2022, AB and CD entered a contract to sell the Property.

In the 2022 income year, XYZ had an aggregated turnover of less than $2 million.

Both AB and CD are considered to be a CGT concessional stakeholder of XYZ.

In the 2022 income year, AB and CD declared that XYZ is no longer a reporting entity.

XYZ is in the process of being sold. AB and CD have reduced their working hours with the intention to retire in full.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 328-125

Reasons for decision

Basic conditions

Section 152-10 of the ITAA 1997 contains the basic conditions that must be satisfied to be eligible to apply the 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 would (apart from this Division) 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.

Passively held asset

The basic conditions allows you to access the concessions for a CGT asset you own where you are not carrying on a business, but that CGT asset is used in the business of your affiliate or an entity connected with you. The basic condition can also apply where your asset is held ready for use in, or is inherently connected with, the business of your affiliate or entity connected with you.

Meaning of when an entity is connected with you

Section 328-125 of the ITAA 1997 provides the meaning of connected with an entity. An entity is connected with another entity if:

                      •                      either entity controls the other entity; or

                      •                      both entities are controlled by the same third entity.

An entity controls another entity if it or its affiliate (or all of them together) when:

                      •                      owns, or has the right to acquire ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) of any distribution of income or capital by the other entity.

Application to your circumstances

CGT event A1 happened when AB and CD entered the contract to sell the property in the 2022 income year which will result in a capital gain. AB and CD are equal shareholders of XYZ and are therefore connected with XYZ.

XYZ is a CGT small business entity with a turnover of less than $2 million that used the property in its business, satisfying sub-paragraph 152-10(2)(c)(iii) of the ITAA 1997. The property satisfies the active asset test as the property has been held for more than 15 years and an active asset for at least 7.5 of those years. Therefore AB and CD satisfy the basic conditions.

Question 2

15-year exemption

Section 152-105 of the ITAA 1997 states you can disregard a capital gain from a CGT event happening to a CGT asset if you:

                      •                      satisfy the basic conditions for the CGT small business concessions

                      •                      continuously owned the CGT asset for the 15-year period ending just before the CGT event happened.

If you are an individual, you must have been:

                      •                      at least 55 years old and the CGT event happened in connection with your retirement, or

                      •                      permanently incapacitated at the time of the CGT event.

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 a retirement. However, it isn't necessary for there to be a permanent and everlasting retirement from the workforce. A CGT event may be in connection with your retirement, even if it occurs at some time before retirement. Whether particular cases satisfy the conditions depends very much on the facts of each case.

Application to your circumstances

As discussed above, AB and CD satisfy the basic conditions, and the property has been held for more than 15 years prior to the CGT event happening.

AB and CD are both over 55 years of age and the property disposal has occurred in connection with their retirement. AB and CD are selling the business and have declared that XYZ is no longer a reporting entity. AB and CD have reduced their working hours and intend to retire in full. Therefore, AB and CD are entitled to apply the 15-year exemption to disregard the entire capital gain.