Edited version of private advice

Authorisation Number: 1052034577087

Date of advice: 15 September 2022

Ruling

Subject: CGT - small business basic conditions

Question

Will you satisfy the basic conditions under Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) for small business relief upon the disposal of Unit A?

Answer

Yes.

Question

Will you satisfy the basic conditions under Subdivision 152-A of the ITAA 1997 for small business relief upon the disposal of Unit B?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Individual A and Individual B (you) jointly acquired two Units after 20 September 1985.

Each Unit is on a different strata title.

The partnership of Individual A and B (the partnership) first used Unit A and B to operate a business in the 19XX/XX financial year.

The partnership carried on the business in Unit A up until the 20XX/XX financial year.

The partnership used Unit B for three years, then remained unused up until 20XX.

Unit A was rented out to an unrelated party from 20XX up until the property was sold.

Unit B was rented out to an unrelated party from 20XX up until the property was sold.

You advised you satisfied the $X million MNAV test.

You are both over 55 years and retiring from all active business.

The Units were both sold in the 20XX/XX financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Section 152-35

Reasons for decision

To qualify for the small business CGT concessions, the basic conditions in subdivision 152-A of the ITAA 1997 must be satisfied.

The basic conditions are:

•         A CGT event happens in relation to a CGT asset of yours in an income year,

•         The event would have resulted in a gain,

•         The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

•         At least one of the following applies;

o        you are a small business entity for the income year,

o        you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997,

o        you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

o        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.

Active asset test

A capital gains tax (CGT) asset will satisfy the active asset test if:

(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 test period, or

(b) 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 test period.

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

Subsection 152-40(4) of the ITAA 1997 provides some exceptions and lists some assets that cannot be active assets. Paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset, unless that main use was only temporary. That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

Application to your circumstances

In your case, you have owned Unit A for more than 15 years and the property was an active asset for at least 7½ years. Therefore the property satisfies the active asset test. It does not matter that the property was subsequently used to derive rent. The sale of Unit A will cause a CGT event that results in a capital gain and you satisfy the maximum net asset value test. Therefore you satisfy the basic conditions in subdivision 152-A of the ITAA 1997 for Unit A.

You have owned Unit B for more than 15 years however it was only used in the business for approximately three years and for the remainder of the ownership period it was either unused or rented to an unrelated party. Unit B has not been an active asset for at least 7 ½ years, therefore you do not satisfy the active asset test for Unit B. You do not satisfy the basic conditions in subdivision 152-A of the ITAA 1997 in relation to the disposal of Unit B.