Edited version of private advice

Authorisation Number: 1052082782227

Date of advice: 13 February 2023

Ruling

Subject: CGT - small business concessions

Question 1

Did the commercial property (the Property) satisfy the active asset test in subsection 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Can you disregard the capital gain from the sale of your interest in the Property under the small business 15-year exemption in section 152-105 of the ITAA 1997?

Answer

No

Question 3

If the answer to question 2 is no, in respect of the capital gain that arose from the sale of your interest in the Property, can you apply the small business 50% reduction in subsection 152-205 of the ITAA 1997?

Answer

Yes

Question 4

If the answer to question 2 is no, can you choose to disregard all or part of the capital gain from the sale of your interest in the Property under the small business retirement exemption in section 152-305 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period

Income year ended 30 June YYYY

The scheme commences on

1 January YYYY

Relevant facts and circumstances

In YYYY, you and your spouse purchased the Property in joint names.

Your intention and main purpose for acquiring the Property was for you to operate a business from the upstairs floor. The fact that the downstairs floor could be leased to derive additional income was incidental, or secondary, purpose for the Property.

The Property consisted of two floors of similar floor area.

In or around MMM YYYY, you and your spouse sold the Property. At this time, your spouse purchased a 50% interest in the Property as an equal tenant in common.

In MMM YYYY, you reacquired a 50% interest in the Property and, from this time, you and your spouse wholly owned the Property as tenants in common.

In MMM YYYY, you and your spouse entered into a contract to sell the Property, settlement of the sale was completed in MMM YYYY.

Income from the Property

The downstairs floor was rented to independent tenants, that were not your "affiliates" or "entities connected with you" under sections 328-125 or 328-130 of the ITAA 1997.

The rent received from the downstairs-floor tenants prior to DD MMM YYYY was approximately $X per annum. In the YYYY to YYYY income years, the rent received from the downstairs-floor tenants was:

You and an unrelated individual carried on a business in partnership (the Partnership) using the upstairs floor of the Property until the Partnership was dissolved on DD MMM YYYY.

The rent paid by the Partnership until DD MMM YYYY was approximately $X per annum.

The fees income generated by the Partnership from the YYYY income year to the YYYY income year was between $X and $X per annum.

From DD MMM YYYY, you used the upstairs floor of the Property as the sole proprietor of a business.

In the YYYY to YYYY income years, your business paid rent to you and your spouse of $X per annum. Your total business income was as follows:

•         YYYY: $X

•         YYYY: $X

•         YYYY: $X

•         YYYY: $X

•         YYYY: $X.

Other relevant facts

You acted in concert with your spouse in relation to your business affairs.

You wound up your business in MMM YYYY and from MMM YYYY you began working with another business, part-time, being paid a salary. The hours of work under your employment contract are flexible and since MMM YYYY you have worked a maximum of X hours per week, but also zero hours in some weeks.

You did not sell your client book to your new employer on winding-up your business in MMM YYYY.

Your new employer was not and is not your "affiliate" or "connected with you" under sections 328-125 or 328-130 of the ITAA 1997.

As of DD MMM YYYY, you had one remaining client whose affairs you hope to see through to finalisation prior to retiring completely.

The basic conditions in paragraphs 152-10(1)(a), (b) and (c) of the ITAA 1997 were satisfied for the capital gain you made from the sale of the Property.

Your date of birth is DD MMM YYYY.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 paragraph 152-10(1)(d)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 paragraph 152-35(1)(b)

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

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

Income Tax Assessment Act 1997 subsection 152-40(2)

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

Income Tax Assessment Act 1997 paragraph 152-40(4A)(b)

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 paragraph 152-105(a)

Income Tax Assessment Act 1997 paragraph 152-105(b)

Income Tax Assessment Act 1997 paragraph 152-105(c)

Income Tax Assessment Act 1997 paragraph 152-105(d)

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 subsection 152-205

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 subsection 152-305(1)

Income Tax Assessment Act 1997 paragraph 152-305(1)(b)

Income Tax Assessment Act 1997 paragraph 152-305(1)(c)

Reasons for decisions

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1 - Active asset test - subsection 152-35

Summary

Your ownership interest in the Property satisfied the active asset test in subsection 152-35.

Detailed reasoning

A capital gain you make may be reduced or disregarded under Division 152 if the basic conditions in paragraphs 152-10(1)(a) to (d) are satisfied for the gain.

As stated in the facts, the basic conditions in paragraphs 152-10(1)(a), (b) and (c) were satisfied for the capital gain made from the sale of the Property. As such, only paragraph 152-10(1)(d), which requires that the CGT asset satisfies the "active asset" test, set out in section 152-35, is considered below.

Paragraph 152-35(1)(a) sets out 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 specified in subsection 152-35(2). According to subsection 152-35(2), the relevant period:

(1)  begins when you acquired the asset; and

(2)  ends at the earlier of:

-       the CGT event; and

-       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.

A (you) acquired your ownership interest in the Property in MMM YYYY and sold it in MMM YYYY. In MMM YYYY, you carried on a business using the upstairs floor of the Property which did not cease until MMM YYYY.

As such, to satisfy the active asset test, your interest in the Property had to be an "active asset" for a total of at least half of the period beginning MMM YYYY and ending in MMM YYYY, being X years and X months of that period.

Your interest in the Property was an 'active asset', under subsection 152-40(1), at any time when you owned it and it was used in the course of a business you carried on (whether alone or in partnership). However, assets that are used mainly to derive rent cannot be active assets (paragraph 152-40(4)(e)).

Where an asset is used for mixed purposes, as explained in paragraph 26 of Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent?:

•         the 'main' use at any given time is a question of fact, dependent on the circumstances,

•         no one single factor will necessarily be determinative, and

•         resolving the question is likely to involve a consideration of factors such as:

-       the comparative areas of use of the premises (between deriving rent and other uses); and

-       the comparative levels of income derived from the different uses of the asset.

Since you acquired your interest in the Property, you have used the Property both for deriving rent and in carrying on your business activities, initially in partnership and later as a sole practitioner.

The Property consisted of two floors of similar floor area, as such, the comparative 'areas of use' of the premises provide little assistance in determining which use was the Property's 'main' use.

However, a comparison between the income from the two floors, as detailed in the facts, shows that although the rent paid by the downstairs floor tenants was, at times, more than the rent paid for the upstairs floor, the total business income you produced in each year significantly outweighed the rent derived from the downstairs floor tenants. Based on the facts, it is considered that your main use of your interest in the Property since DD MMM YYYY was not to derive rent.

In your circumstances, your ownership interest in the Property was an active asset for at least half of the period specified in subsection 152-35(2) and as such, it satisfied the active asset test in subsection 152-35.

Question 2 - Small business 15-year exemption - Subdivision 152-B

Summary

As you did not own your interests in the Property for a continuous period of 15 years you are not entitled to apply the small business 15-year exemption.

Detailed reasoning

Under the small business 15-year exemption, you can disregard any capital gain arising from a CGT event if the four conditions in section 152-105 are satisfied.

One of the four conditions requires that you continuously owned your interest in the Property for the 15-year period ending just before the sale of the Property (paragraph 152-105(b)).

As you did not own your interests in the Property for a continuous period of 15 years you are not entitled to apply the small business 15-year exemption.

Question 3 - Small business 50% reduction - Subdivision 152-C

Summary

As the basic conditions in Subdivision 152-A were satisfied for the capital gain, you can apply the small business 50% reduction in subsection 152-205.

Detailed reasoning

The small business 50% reduction provides that the amount of a capital gain remaining after applying step 3 of the method statement in subsection 102-5(1) is reduced by 50% if the basic conditions in Subdivision 152-A are satisfied for the gain (subsection 152-205).

Unlike other small business concessions, there are no further conditions to be satisfied.

As stated in the facts, the basic conditions in paragraphs 152-10(1)(a), (b) and (c) were satisfied for the gain from the sale of your interest in the Property. Further, as determined in question 1 (above), your interest in the Property satisfied the active asset test. Therefore, paragraph 152-10(1)(d) was satisfied for the gain.

As the basic conditions were satisfied for the gain, you can apply the small business 50% reduction in subsection 152-205 to reduce the balance of the capital gain by 50%.

Question 4 - Small business retirement exemption - Subdivision 152-D

Summary

You can choose to disregard all or part of the capital gain from the sale of your interest in the Property under the small business retirement exemption in section 152-305.

Detailed reasoning

The small business retirement exemption provides, under subsection 152-305(1), that you can choose to disregard all or part of a capital gain if:

•         the basic conditions in Subdivision 152-A are satisfied for the gain.

•         if you under 55 just before making the choice, you make a contribution to a superannuation fund or an RSA in accordance with paragraphs 152-305(1)(b) and (c).

If you are 55 or older just before you make a choice for the purpose of the small business retirement exemption, you are not required to contribute any amount to a superannuation fund or an RSA, even if you were under 55 when you received the capital proceeds from the sale.

As discussed in previous questions of this ruling, on the facts, the basic conditions in Subdivision 152-A were satisfied for the gain from selling your interest in the Property.

As you are over 55 and have not yet made a choice for the purpose of the small business retirement exemption, you are not required to make a contribution in accordance with paragraphs 152-305(1)(b) and (c), and you can choose to disregard all or part of the capital gain from the sale of your interest in the Property under the small business retirement exemption in section 152-305.