Edited version of private advice

Authorisation Number: 1052203148223

Date of advice: 15 December 2023

Ruling

Subject: CGT - small business concessions

Question

Is the sale of the property 'in connection with your retirement' for the purposes of the small business 15-year exemption?

Answer

No.

Question

If you are not eligible for the small business 15-year exemption, can you apply the small business 50% active asset reduction and/or the small business retirement exemption?

Answer

Yes.

This ruling applies for the following period:

Year Ending 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

You ran a business as a sole trader for over XX years. The business was run from a commercial property.

The property was acquired in year ending 30 June 20XX.

The nature of the business was alternative health services.

You sold the business but kept the property and rented it.

The date the property ceased being used to carry on a business was December of 20XX

The property started to be used as a rental property in January of 20XX

You began an account-based pension sometime later.

You wish to sell the property which has been owned for over XX years.

You intend to deposit the proceeds into your self-managed super fund in order to continue paying lump sums as needed to maintain your retirement and lifestyle.

You meet the maximum net asset value test.

You effectively retired in January 20XX. You continued to carry on some work in that area but mainly for research purposes, this involved less than 10 hours a week. The activities were not carried on for the purpose of providing income.

You began the process of sale in late 20XX.

The reasons for the delay between your retirement and the sale of the asset are as follows:

•         you decided to relocate and downsize, and

•         you wanted to see how the real estate market would change during and post Covid19.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 section 152-320

Reasons for decision

Section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) allows an individual to disregard any capital gain arising from a capital gains tax (CGT) event if all of the following conditions are satisfied:

(a)  the basic conditions in Subdivision 152-A are satisfied for the gain; you continuously owned the *CGT asset for the 15-year period ending just before the CGT event;

(b)  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;

(c)   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.

Specifically, the condition outlined in section 152-105(d)(i) of the ITAA 1997 stipulates that you must be over 55 years of age at the time the CGT event occurs and that the event is in connection with your retirement. In this case there would need to be a significant reduction of hours you work or a significant change in the nature of your activities to be regarded as a retirement. While the words 'in connection with' can apply there the CGT event occurs sometime after retirement, each case will depend on its own particular facts.

You began your retirement in January of 20XX and did not carry on a business from that point forward. You also derived rental income from that point forward. You have started the process to sell the property in late 20XX. The reasons for the delay in the sale of the property was your decision to relocate and downsize, and to see how the real estate market would change during and post Covid19.

Based on the fact that you began your retirement over four years prior to the sale of the property and until recently there were no attempts made to sell the property, the sale is not considered to be 'in connection with' your retirement. Therefore, as all of the requirements of section 152-105 of the ITAA 1997 have not been met, you are not eligible to apply the small business 15-year exemption under subsection 152-105 of the ITAA 1997.

In order to access the small business 50% reduction outlined in Subdivision 152-C of the ITAA 1997, you must first satisfy the basic conditions that are outlined in subdivision 152-A of the ITAA 1997which are as follows:

This Subdivision sets out some basic conditions for relief. If the basic conditions are satisfied, an entity may be able to reduce its capital gains using the small business concessions in this Division.

The 2 major basic conditions are:

(a) the entity must be a CGT small business entity or a partner in a partnership that is a CGT small business entity, or the net value of assets that the entity and related entities own must not exceed $6,000,000; and

(b) the CGT asset must be an active asset.

The active asset test outlined in section 152-35 of the ITAA 1997. The active asset test is satisfied if:

(a) 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 (2); or

(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 ½ years during the period specified in subsection (2).

The test 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.

In your case, you satisfy the maximum net value asset test, and based on the fact that you have owned the asset for more than 15 years, and it was considered to be active for more than 7 ½ years, you therefore satisfy the active asset test. Accordingly, you satisfy the basic conditions and by extension the eligibility criteria required to access the small business 50% reduction concessions.

You may also apply the small business retirement exemption under Subdivision 152-D of the ITAA 1997. The conditions for this concession are outlined in section 152-305(1) of the ITAA 1997 as follows:

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 an RSA; and

(c)   the contribution is made:

(i) if the relevant CGT event 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.

As you already satisfy the conditions outlined in section 152-A of the ITAA 1997 and are over the age of 55, you are eligible to access this concession as well.