Edited version of private advice

Authorisation Number: 1052035123574

Date of advice: 28 October 2022

Ruling

Subject: CGT - small business concessions

Question 1

Do you meet the conditions to apply the small business 15-year exemption under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain made on the disposal of your ownership interest A in the property you own?

Answer

Yes.

You can entirely disregard a capital gain arising from a CGT event when the basic conditions under section 152-10 of the ITAA 1997 are satisfied and you continuously owned the CGT asset for the 15-year period ending just before the CGT event, and you are either 55 or over at the time of the CGT event and the event happens in connection with your retirement or you are permanently incapacitated at the time of the CGT event.

In your case, you intend to transfer the property to related parties which will trigger CGT events A1 and result in a capital gain. You do not carry on a business; however, your CGT asset is used in a business carried on by a small business entity that is connected with you. You have used the asset in the course of carrying on a business that was carried by you in partnership. You have held the asset for more than 15 years and it has been used as an active asset for at least 7.5 years during the time of ownership. You are over 55 years of age, and the CGT event will occur in connection to your retirement. Accordingly, you will be entitled to apply the small business 15-year exemption to disregard any capital gain made upon the sale of your interest in the properties.

Question 2

Do you meet the conditions to apply the small business retirement exemption under section 152-305 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain made on the disposal of your interest B in the property you own?

Answer

Yes.

You can disregard all or part of a capital gain when the basic conditions are satisfied up to the lifetime limit of $500,000 in respect of any one individual. This limit is reduced by any previous amounts disregarded under the small business retirement exemption. When you are over the age of 55 years old there is no requirement to contribute an amount to your superannuation fund or retirement savings account. The retirement exemption can be used after the application of the 50% general CGT discount.

In your case, you intend to transfer the property to related parties which will trigger CGT events A1 and result in a capital gain. You do not carry on a business; however, your CGT asset is used in a business carried on by a small business entity that is connected with you. You have held the asset for less than 15 years and it has been used as an active asset for at least half of the total period owned. Accordingly, you are entitled to apply the small business retirement exemption up to the lifetime limit.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are over the age of 55.

In the relevant year you acquired 50% ownership interest ('Interest A') as a tenant in common with your late husband in the property ('Property').

The Property is made up of 2 titles.

You have owned your Interest A for more than XX years.

You carried on a business on the Property in partnership for more than 7.5 years.

In the relevant year the partnership ceased to carry on a business and the business enterprise was restructured into the Trust ('Trust').

The Trust had 4 beneficiaries: you, your late husband and members of your family.

In the relevant year, the Company ('Corporate Trustee') was established and appointed as a trustee of the Trust.

You are the main shareholder and a director of the Corporate Trustee.

You, your late husband and members of your family were appointed as equal shares (25% each) directors of the Corporate Trustee.

You and other directors of the Corporate Trustee have been receiving a wage from the date of its establishment.

In the relevant year your husband has passed away and you acquired his 50% ownership interest ('Interest B') in the Property and 25% of shares in the Corporate Trustee as part of the deceased estate.

In the income year 1 the remaining beneficiaries (you, your son and his wife) received equal distributions of the Trust's income.

In the income year 2 the Trust generated an income loss, and no income has been distributed to the beneficiaries. The Corporate Trustee has nominated you and other beneficiaries as the controllers of the Trust for the relevant income year.

In the income years 3 and 4 the Trust generated an income loss, and no income has been distributed to the beneficiaries. The Corporate Trustee will nominate the beneficiaries to be the controllers of the Trust for both income years.

You will be nominated to receive at least 40% of the Trust's income distributions in the 2022-23 income year. In case where the Trust will generate an income loss and no distributions can be made, the Corporate Trustee will nominate you and other two beneficiaries to be the controllers of the Trust for that year.

You have been actively involved in the Trust's business operation by:

•         attending accounting and general meetings

•         participating in the business' financial and operational planning

•         participating in planning future business development.

The Trust's estimated aggregated turnover for the 20XX-XX income year is less than $X million.

You are planning to transfer the Property to your family members.

You will retire upon transferring your Property: you will retire as director of the Corporate Trustee and cease to receive wage and profit distributions from the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-78

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 section 328-125