Edited version of private advice

Authorisation Number: 1052053724875

Date of advice: 4 November 2022

Ruling

Subject: CGT - small business concessions

Question

Will you satisfy the basic conditions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) to enable you to access the CGT Small Business concessions on disposal of the Property?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Background and history

You acquired a 50% ownership interest in the property (the Property) in 19XX, which has been used in connection with various businesses and business entities either associated or connected to you.

Your spouse held the other 50% ownership interest in the Property.

You haven't carried on business in your own right at the Property. However, the Partnership and other entities associated and/or connected with you (the Group) have operated out of the Property. The partners of the Partnership were you and your spouse with each of you holding a 50% interest. The Partnership continued to operate out of and use the Property as its business premises right up to just before settlement in 20xx.

Company A

Company A was incorporated in 19XX and conducted a several businesses over the years.

Company A has always been 100% held by you and you are the sole director.

The Property

From 19XX to 20XX the Property and facilities were used solely in connection with your spouse's business activities and that of the Group, it was not used for any other activities during this time.

The Group had significant business turnover for the years 19XX to 20XX from using the Property.

The Property was used by the Partnership in running its own business.

Small Business Entity

The Property, owned by you and your spouse, was used in the business activities of the Partnership in the income year ending 30 June 20XX, up to the date of its sale.

The Partnership was conducting business activities and generated business income in the 20XX income year.

The aggregated turnover of you, your spouse, the Partnership and your connected entities was below $X million in the year ended 30 June 20XX.

The Property was owned 50% by you and your spouse, you were both over the age of 55 years old at the time of its sale and had the intention of retiring once the property was sold.

The sale of the Property occurred in the 20XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

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

Income Tax Assessment Act 1997 subsection 152-35(2)

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

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 subparagraph 152-40(4)(e)

Income Tax Assessment Act 1997 section 152-47

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-115

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

Income Tax Assessment Act 1997 subsection 328-130(1)

Reasons for decision

Summary

You satisfy the basic conditions under section 152-10 of the ITAA 1997 to enable you to access the CGT small business concessions on disposal of the Property in the year ended 30 June 20XX. The Property was an active asset, having been used in your affiliates business or that of your connected entities for more than 7½ years during your ownership period of more than 15 years.

Detailed reasoning

Basic conditions for small business concessions

To qualify for the CGT small business concessions, you must satisfy several conditions that are common to all the concessions.

Subsection 152-10(1) of the ITAA 1997 contains the following basic conditions you must satisfy to be eligible for the small business CGT concessions:

(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).

To be eligible to apply the small business CGT concessions you must satisfy all four of the basic conditions above.

Paragraph 152-10(1)(c) of the ITAA 1997, states thatat least one of the requirements listed at subparagraphs (i) to (iv) must apply. For the purposes of this ruling we are considering subparagraph 152-10(1)(c)(iv). For this section to apply, the conditions mentioned in subsection 152-10(1A) or (1B) must be satisfied in relation to the CGT asset in the income year. Subsection 152-10(1A) is not relevant in this case.

The conditions in subsection 152-10(1B) of the ITAA 1997 are satisfied if:

(a)  you are a partner in a partnership in the income year; and

(b)  the partnership is a *CGT small business entity for the income year; and

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

(d)  the CGT asset is not an interest in an asset of the partnership; and

(e)  the business you carry on as a partner in the partnership referred to in paragraph (a) is the business that you, at a time in the income year, carry on (as referred to in subparagraph 152-40(1)(a)(i) or paragraph 152-40(1)(b)) in relation to the CGT asset.

CGT Small Business Entity

To be considered a CGT small business entity in subparagraph 152-10(1)(c)(i) of the ITAA 1997, the entity needs to meet the following definition subsection 152-10(1AA):

(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.

Subsection 328-110(1) of the ITAA 1997 states:

You are a small business entity for an income year (the current year) if:

(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.

Active asset test

The fourth basic condition to be met is for the CGT asset to satisfy the active asset test in section 152-35 of the ITAA 1997.

Subsection 152-35(1) of the ITAA 1997 states:

A *CGT asset satisfies the active asset test if:

...

(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 7 and a half years during the period specified in subsection (2).

Subsection 152-35(2) of the ITAA 1997 states:

The period:

(a) begins when you *acquired the asset, and

(b) ends at the earlier of:

(i)    the *CGT event; and

(ii)   if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

Subsection 152-40(1) of the ITAA 1997 relevantly states:

A *CGT asset is an active asset at a time if, at that time you:

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

(i) you; or

(ii) your *affiliate; or

(iii) another entity that is *connected with you; or

(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

The active asset test is subject to the exclusions in subsection 152-40(4) of the ITAA 1997, under paragraph 152-40(4)(e) an asset whose main use is for deriving rent is specifically excluded from being an active asset.

Under subsection 328-125(1) of the ITAA 1997 an entity is connected with another entity if:

(a) one entity controls the other entity, or

(b) both entities are controlled by the same third entity.

A company is controlled by an individual owner where the individual or the individual together with their affiliates carry between them the right to exercise a control percentage that is at least 40% of the voting power in the company (paragraph 328-125(2)(b) of the ITAA 1997).

Under subsection 328-130(1) of the ITAA 1997, an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with the you, in relation to the affairs of the business of the individual or company.

However, the meaning of affiliate can be extended for a spousal relationship. For the purposes of determining whether an individual's spouse is an affiliate for the purpose of Subdivision 152-A of the ITAA 1997, section 152-47 of the ITAA 1997 can be applied. This provision deems an affiliate relationship with an individual's spouse where an asset owned by one entity is used in the course of carrying on a business by another entity, and the business entity is not otherwise an affiliate of or connected with the asset owner (subsection 152-47(1)).

Application to your circumstances

152-10(1)(a)

The Property satisfies the definition of a CGT asset provided in subsection 108-5(1) of the ITAA 1997.

152-10(1)(b)

CGT event A1 happened upon the sale of the Property (section 104-10 of the ITAA 1997). This event resulted in a capital gain for you, but for the application of Division 152 of the ITAA 1997.

Therefore, the first two basic conditions in section 152-10 of the ITAA 1997 are satisfied.

152-10(1)(c)

Basic condition 152-10(1)(c)(iv) of the ITAA 1997

Paragraph 152-10(1)(c) of the ITAA 1997, states that at least one of the requirements listed at subparagraphs (i) to (iv) must apply. For the purposes of this ruling we are considering subparagraph (iv):

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

For section 152-10(1)(c)(iv) of the ITAA 1997 to apply the conditions mentioned in subsection 152-10(1A) or (1B) must be satisfied in relation to the CGT asset in the income year. Subsection 152-10(1A) of the ITAA 1997 is not relevant in this case. Subsection 152-10(1B) is discussed below.

The conditions in subsection 152-10(1B) of the ITAA 1997 are satisfied as:

(a)  you are a partner in a partnership in the income year; and

(b)  the partnership is a *CGT small business entity for the income year; and

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

(d)  the CGT asset is not an interest in an asset of the partnership; and

(e)  the business you carry on as a partner in the partnership referred to in paragraph (a) is the business that you, at a time in the income year, carry on (as referred to in subparagraph 152-40(1)(a)(i) or paragraph 152-40(1)) in relation to the CGT asset.

Therefore, you satisfy the third requirement of the basic conditions.

152-10(1)(d) - Active asset test

During the period 19XX and 20XX the Property was used or held ready for use in the course of carrying on a business, that was carried on by your spouse or an entity connected with you.

Conclusion

In conclusion, the Property satisfies the active asset test, therefore you satisfy all of the basic conditions for small business relief under section 152-10 of the ITAA 1997.