Edited version of private advice

Authorisation Number: 1052169097152

Date of advice: 22 November 2023

Ruling

Subject: CGT - small business concessions

Question 1

Will you satisfy 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 the interest in property A you acquired by way of survivorship?

Answer

Yes.

Question 2

Will you satisfy the basic conditions to apply the small business capital gains tax (CGT) concessions in Subdivision 152-A of the ITAA 1997 in relation to the disposal of property B?

Answer

Yes.

Question 3

Do you satisfy the conditions to apply the retirement exemption in Subdivision 152-D of the ITAA 1997 in relation to the disposal of property B?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

You and your spouse purchased property A as joint tenants prior to 20 September 1985.

You and your spouse lived at property A and operated a business from the property.

You and your spouse built dams, established irrigations systems, and built packing and equipment sheds.

Your spouse passed away more than 15 years ago. You became the sole owner of property A at this time.

In 20XX you purchased the adjoining property B. This property was used to carry on a business.

At various times you have rented out numerous sheds on both property A and B as well as the home on property A.

Since 19XX, approximately Y% of the area of property A has been used to derive rental income.

Since 20XX, approximately Z% of the area of property B has been used to derive rental income.

The income derived since from the rental activity has generally exceeded the income derived from the cattle breeding activity.

You intend to sell both property A and B in a single transaction.

You are over 55 years old and will retire once the properties are sold.

You are a CGT small business entity with a turnover of less than $X million in the 2023-24 financial year.

Just prior to the sale of property A and B your assets, and assets of affiliates and connected entities will be less than $X million.

Relevant legislative provisions

Income Tax Assessment Act 1997Subdivision 152-A

Income Tax Assessment Act 1997section 152-105

Income Tax Assessment Act 1997Subdivision 152-D

Reasons for decision

Question 1

Summary

You will satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 for the proposed disposal of property A and the additional conditions for the 15-year exemption.

Detailed reasoning

Section 152-105 of the ITAA 1997 outlines the conditions required for the 15-year exemption where the CGT asset is owned by an individual.

If you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a)  the basic conditions in Subdivision 152-A are satisfied for the gain;

(b)  you continuously owned the CGT asset for the 15-year period ending just before the CGT event;

(c)   if the CGT asset is a share in a company or an interest in a trust - the company or trust had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset;

(d)  either:

                                        (i)    you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

                                       (ii)    you are permanently incapacitated at the time of the CGT event.

Basic conditions for relief

The basic conditions for relief under the CGT small business concessions are outlined in Subdivision 152-A of the ITAA 1997.

Subsection 152-10(1) of the ITAA 1997 provides that a capital gain you make may be reduced or disregarded 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 (apart from this Division) have resulted in a 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 small business entity for the income year and the CGT asset is 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 CGT small business entity that is your affiliate, or an entity connected with you;

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

Active asset test

The basic conditions in Subdivision 152-A of the ITAA 1997 require the CGT asset to satisfy the active asset test. The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 test period detailed below, 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 7.5 years during the test period.

Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent can not be an active asset unless the main use for deriving rent was only temporary.

Taxation Determination TD 2006/78 considers, amongst other issues, the situation where there is part business and part rental use of an asset. It states that an asset owned by the taxpayer and used partly for business purposes and partly to derive rent can be an active asset under section 152-40 of the ITAA 1997 where it is considered that the main use of the premises is not to derive rent. Paragraph 26 of TD 2006/78 states that:

If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor will necessarily be determinative, and resolving the matter is likely to involve a consideration of a range 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.

Example 5 in TD 2006/78 considers mixed use of a property as follows:

Mick owns land on which there are a number of industrial sheds. He uses one shed (45% of the land by area) to conduct a motor cycle repair business. He leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the motor cycle repair business is 80% of the total income (business plus rentals) derived from the use of the land and buildings.

In determining if the main use of the land is to derive rent, it is appropriate to consider a range of factors. In this case, a substantial (although nevertheless not a majority) proportion by area of the land is used for business purposes. As well, the business proportion of the land derives the vast majority (80%) of the total income. In all the circumstances, the Tax Office considers the main use of the land in this case is not to derive rent and accordingly the land is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997

Application to your circumstances

A CGT event will occur when you dispose of property A which will result in a capital gain. You satisfy the maximum net asset value test as your assets, and those of your affiliates and connected entities are less than $6 million.

The interest you acquired in property A, from your late spouse, has been owned by you for more than 15 years. Less than X% of the area of property A has been used to derive rental income for a period of time. In accordance with TD 2006/78 given the majority of the area of the land is used for business purposes we do not consider the main use of the property is to derive rent. Therefore, property A satisfies the active asset test and you satisfy the basic conditions.

In this case you are over 55 years of age and the sale of property A will happen in connection with your retirement. As you satisfy the basic conditions and the conditions for the 15-year exemption you are entitled to disregard any capital gain made on the disposal of the interest in property A that you acquired from your spouse.

Question 2

Application to your circumstances

A CGT event will occur when you dispose of property B which will result in a capital gain. You satisfy the maximum net asset value test as your asset, and those of your affiliates and connected entities are less than $6 million.

You acquired property B in 20XX. Less than Z% of the area of property B has been used to derive rental income for a period of time. In accordance with TD 2006/78 given the majority of the area of the land is used for business purposes we do not consider the main use of the property is to derive rent. Therefore, property B satisfies the active asset test and you satisfy the basic conditions.

Question 3

Small business retirement exemption

Subdivision 152-D of the ITAA 1997 sets out the conditions for the small business retirement exemption. If you are an individual, you can choose to disregard all or part of a capital gain under this provision if:

• you satisfy the basic conditions
• you keep a written record of the amount you chose to disregard (the CGT exempt amount), and
• if you were under 55 years of age just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA).

The contribution must be made:

• when you made the choice to use the retirement exemption, or when you received the proceeds (whichever is later), or
• if the relevant event is CGT event J2, J5 or J6 - when you made the choice to use the retirement exemption.

If you are 55 or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA even though you may have been under 55 years of age when you received the capital proceeds.

An individual's CGT retirement exemption limit is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual under subdivision 152-D of the ITAA 1997.

Application to your circumstances

In this case, as discussed in question 2, you satisfy the basic conditions in relation to the proposed disposal of property B. Given you are over 55 years of age you are not required to make a contribution to a complying superannuation fund.

You are entitled to choose the retirement exemption and reduce the capital gain made on the proposed disposal of property B up to the CGT retirement exemption lifetime limit of $500,000. You should keep a written record of the amount you choose to disregard.