Edited version of private advice

Authorisation Number: 1052046043861

Date of advice: 2 November 2022

Ruling

Subject: CGT small business concessions and GST on sale of property

Question 1

Do you meet the basic eligibility conditions of the small business capital gains tax concessions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. You meet the basic eligibility conditions of the small business capital gains tax concessions under section 152-10 of the ITAA 1997 because an entity that is connected to you is a CGT small business entity for the income year, and both shares of your property are active assets.

Question 2

Are you eligible for the retirement exemption on both shares of your CGT asset under section 152-305 of the ITAA 1997?

Answer

Yes. You are eligible for the retirement exemption on both shares of your CGT asset under section 152-305 of the ITAA 1997 because you are over 55 years old and satisfy the basic eligibility conditions of the small business CGT concessions.

Question 3

Does the cost base of the share transferred to you from your former spouse, through family law consent orders become part of your cost base?

Answer

Yes. The cost base of your former spouse's share of your CGT asset that was transferred to you through consent orders through family law consent orders becomes the first element of your cost base under section 126-5(5) of the ITAA 1997.

Question 4

Is the proposed sale of your commercial property a taxable supply under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, the proposed sale of your commercial property is not a taxable supply under section 9-5 of the GST Act.

This ruling applies for the following period

Year ended 30 June YYYY

The scheme commences on:

DD MM YYYY

Relevant facts and circumstances

You own a commercial property.

You acquired the property jointly with your former spouse in early YYYY.

You purchased the property for $X and associated purchase costs.

You are the sole director and shareholder of ABC Pty Ltd.

ABC Pty Ltd has a turnover of less than $2 million.

ABC Pty Ltd has rented your commercial property since DD MM YYYY and used it to operate its business.

You separated from your former spouse in late YYYY, and you have since divorced.

Property settlements were set out in consent orders under the Family Law Act 1975 dated DD MM YYYY.

You acquired your former spouse's share of the commercial property as a result of theconsent orders.

Your net assets are worth less than $X million.

You have an Australian Business Number (ABN) but you are not registered for goods and services tax (GST).

The net rental income has been included in the annual tax returns of the joint owners since YYYY and does not exceed the $75,000 GST turnover threshold.

You are planning on selling the property.

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 152-305

Income Tax Assessment Act 1997 section 152-315

Income Tax Assessment Act 1997 section 152-320

Income Tax Assessment Act 1997 section 126-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 25-5

A New Tax System (Goods and Services Tax) Act 1999 section 188-15

A New Tax System (Goods and Services Tax) Act 1999 section 188-20

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decision

Question 1

Do you meet the basic eligibility conditions of the small business capital gains tax concessions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

You meet the basic eligibility conditions of the small business capital gains tax concessions under section 152-10 of the ITAA 1997.

Detailed reasoning

Small Business Concessions

Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the basic conditions that need to be met to apply the small business CGT concessions.

Subsection 152-10(1) states that a capital gain that you make may be reduced or disregarded under Division 152 ITAA 1997 if the following basic conditions are satisfied:

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

(b) the event would have resulted in a 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

(iii) 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

(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 (passively held assets as outlined in subsections 152-10(1A) and 152-10(1B) of the ITAA 1997), and

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

Active assets

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if:

● 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, or

● 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 7 and a half years.

Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use in the course of carrying on a business that is carried on by you, an affiliate or by another entity that is 'connected with' you.

Passively-held assets

The conditions in subsection 152-10(1A) are satisfied in relation to the CGT asset in the income year if:

(a) your affiliate, or an entity that is connected with you, is a small business entity for the income year; and

(b) you do not carry on a business in the income year (other than in partnership); and

(c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

(d) in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.

Entity connected with you

The meaning of connected with entity is contained in section 328-125 of the ITAA 1997.

Subsection 328-125(1) of the ITAA 1997 states that an entity is connected with another entity if:

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

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

Subsection 328-125(2) of the ITAA 1997 states that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates:

(a)  except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

(i) any distribution of income by the other entity; or

(ii) if the other entity is a partnership - the net income of the partnership; or

(iii) any distribution of capital by the other entity; or

(b)  if the other entity is a company - own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the controlpercentage) that is at least 40% of the voting power in the company

(c)   except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

In your case, when you dispose of your CGT asset, CGT event A1 will occur which will result in a capital gain, satisfying paragraph (a) and (b) of section 152-10 of the ITAA 1997.

Your CGT asset has been rented by ABC Pty Ltd since DD MM YYYY. You are the sole director and shareholder of ABC Pty Ltd so therefore ABC Pty Ltd is an entity connected with you. ABC Pty Ltd is a small business entity and has a turnover of less than $2 million. You therefore satisfy paragraph (c)(iv) of section 152-10 of the ITAA 1997 in regards to passively held assets as an entity that is connected with you is a CGT small business entity for the income year.

You have owned your original share of the CGT asset for over 15 years, and it was used to carry on a business by an entity that is connected with you for over 7.5 years during the period starting when you acquired the asset and ending at the time of the CGT event. Therefore, this share of your CGT asset satisfies the active asset test under section 152-35 of the ITAA 1997.

You have owned the share of the CGT asset that was transferred to you from your former spouse through consent orders, for less than 15 years. This share of the property was used to carry on a business by an entity that is connected with you for at least half of the period of time beginning at the time that you acquired the asset (when it was transferred to you) and ending at the earlier of the CGT event, or the cessation of business (if the business ceases to be carried on within 12 months of the CGT event). Therefore, this share of your CGT asset satisfies the active asset test under section 152-35 of the ITAA 1997.You therefore satisfy the basic eligibility conditions of the small business CGT concession under section 152-10 of the ITAA 1997 for both shares of the property.

Question 2

Are you eligible for the retirement exemption on both shares of your CGT asset under section 152-305 of the ITAA 1997?

Summary

You are eligible for the retirement exemption on both shares of your CGT asset under section 152-305 of the ITAA 1997 and since you are over 55 you are not required to pay any amount into a complying superannuation fund. Retirement exemption limit rules will apply.

Detailed reasoning

Retirement exemption

Subsection 152-305(1) of the ITAA 1997 states that if you are an individual, you can choose to disregard all or part of a capital gain if:

(a)  The basic conditions in subdivision 152-A are satisfied for the gain; and

(b)  If you are under 55 just before you make the choice - you contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund or a retirement savings account (RSA); and

(c)   The contribution is made

(i)            If the relevant CGT even is CGT event J2, J5 or J6 - when you made the choice; or

(ii)           Otherwise - at the later of when you made the choice and when you received the proceeds.

You acquired a half share in the property when you purchased the property jointly with your former spouse in YYYY. You acquired the other half share in YYYY when it was transferred to you due to consent orders under the Family Law Act 1975. Both shares of the property satisfy the active asset test under section 152-35 of the ITAA 1997 because they have both been used in the carrying on of a business by your connected entity for over half of their respective ownership periods. As both shares of the asset have satisfied the active asset test, and you have met the other basic eligibility conditions for the small business CGT concessions under section 152-10 of the ITAA 1997, then you have satisfied condition (a) of the retirement exemption under section 152-305 of the ITAA 1997. Because you are over 55 years old, you are not required to pay any amount to a complying superannuation fund. Subsection 152-320(1) of the ITAA 1997 states that an individual's CGT retirement exemption limit at a time is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual under this subdivision.

Therefore, you are eligible for the retirement exemption under section 152-305 of the ITAA 1997 and you are eligible to disregard a capital gain of up to $500,000, reduced by any previous CGT exempt amounts you have disregarded under the retirement exemption. Subsection 152-315(4) states that the amount you choose as your CGT exempt amount must be specified in writing.

Question 3

Does the cost base of the share transferred to you from your former spouse, through family law consent orders become part of your cost base?

Summary

The cost base of your former spouse's share of the CGT asset becomes the first element of your cost base at the time that you acquired it, under subsection 126-5(5) of the ITAA 1997.

Detailed reasoning

Relationship breakdown rollovers

Subsection 126-5(1) of the ITAA 1997 states that there is a roll-over if a CGT event (the trigger event) happens involving an individual (the transferor) and his or her spouse (the transferee), or a former spouse (also the transferee), because of:

(a)  A court order under the Family Law Act 1975 or under a State law, Territory law or foreign law relating to breakdowns of relationships between spouses; or

Subsection 125-5(5) of the ITAA 1997 states that for a disposal case where the transferor acquired the asst on or after 20 September 1985;

(a)  The first element of the asset's cost base (in the hands of the transferee) is the asset's cost base (in the hands of the transferor) at the time the transferee acquired it; and

(b)  The first element of the asset's reduced cost base (in the hands of the transferee) is worked out similarly.

Example

Your spouse transfers land to you because of a court order under the Family Law Act 1975. Any capital gain or loss your spouse makes is disregarded. If the land's cost base at the time you acquired it is $10,000, the first element of the land's cost base in your hands becomes $10,000.

In your case, a relationship breakdown rollover has occurred under section 126-5(1) of the ITAA 1997 because your former spouse's share of the CGT asset has been transferred to you as a result of court orders under the Family Law Act 1975. The capital gains tax which normally applies when ownership of an asset changes is deferred, and will apply to you, as the transferee, when you dispose of the asset. The cost base of your former spouse's share of the CGT asset becomes the first element of your cost base at the time that you acquired it.

Question 4

Is the proposed sale of the property a taxable supply under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Summary

The proposed sale of the property is not a taxable supply under section 9-5 of the GST Act.

Detailed reasoning

Under section 9-5 of the GST Act, an entity makes a taxable supply where the supply:

(a)  you make the supply for consideration; and

(b)  the supply is made in the course or furtherance of an enterprise that you carry on; and

(c)   the supply is connected with the indirect tax zone; and

(d)  you are registered or required to be registered for GST

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In your case, the proposed sale of the property is for consideration and the sale will be connected to Australia; therefore, you will meet the requirements of paragraphs 9-5(a) and 9-5(c) of the GST Act. Further, as the property is a commercial property, its sale will not constitute a GST-free or input taxed supply.

What remains to be determined is whether your sale of the property will be in the course or furtherance of an enterprise that you carry on at the time of the sale and whether you are required to be registered for GST.

Section 23-5 states that you are required to be registered for GST if:

(a)  you are carrying on an enterprise; and

(b)  your GST turnover meets the registration turnover threshold (currently $75,000 unless you are a non-profit body).

The term 'enterprise' is defined in section 9-20 and includes an activity, or series of activities, done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

In your case, you purchased the commercial property in YYYY, and began leasing it. This activity falls within the scope of an 'enterprise' for GST purposes and as such paragraph 23-5(a) is satisfied.

The next issue to consider is whether your GST turnover meets the registration turnover threshold (currently $75,000, or $150,000 for non-profit bodies).

The meaning of GST turnover is contained in Division 188. Subsection 188-10(1) provides that your GST turnover will meet the registration turnover threshold if:

(a)  your current GST turnover is at or above $75,000 and the Commissioner is not satisfied that your projected GST turnover is less than $75,000; or

(b)  your projected GST turnover is at or above $75,000.

Your 'current GST turnover' is defined in section 188-15 as the sum of the values of all of your supplies made in a particular month and the preceding 11 months.

Your 'projected GST turnover' is defined in section 188-20 as the sum of the values of all of your supplies made in a particular month and the following 11 months.

Section 188-25 provides that in calculating your projected GST turnover, you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours.

Goods and Services Tax Ruling GSTR 2001/7; Goods and services tax: meaning of GST turnover, including the effect of section 188-25 on projected GST turnover discusses this issue.

The meaning of 'capital assets' is discussed at paragraphs 31 to 36 of GSTR 2001/7:

Meaning of 'capital assets'

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47 of this Ruling.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

Taking into account the facts of this case, we consider the proposed sale of the commercial property would constitute the transfer of a capital asset for the purposes of section 188-25 and is therefore disregarded when calculating your projected GST turnover.

As your 'current GST turnover' and 'projected GST turnover' will not meet the registration turnover threshold of $75,000, you do satisfy paragraph 23-5(b) and are not required to be registered pursuant to section 23-5.

Conclusion

GST is payable on any taxable supplies that you make. One of the requirements of a taxable supply includes that you are registered or required to be registered for GST.

In this case, you are neither registered nor required to be registered for GST and as such will not be making a taxable supply when you sell the property.