Edited version of private advice

Authorisation Number: 1052223691950

Date of advice: 22 February 2024

Ruling

Subject: CGT - small business concession - active asset test

Question 1

Are you eligible to apply the 50% general discount under Subdivision 115-A of the Income Tax Assessment Act 1997 (ITAA 1997) to reduce the capital gain made on the disposal of the property?

Answer

Yes.

Question 2

Are you eligible to apply the 50% active asset reduction under Subdivision 152-C of the ITAA 1997 to reduce the capital gain made on the disposal of the property?

Answer

Yes.

Question 3

Are you eligible to obtain the small business roll-over on the disposal of the property under Subdivision 152-E of the ITAA 1997?

Answer

Yes.

Question 4

If you do not purchase a replacement asset within the required period and a J5 event occurs, can you apply the retirement exemption under Subdivision 152-D of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 202X

Year ending 30 June 202X

Year ending 30 June 202X

The scheme commenced on:

1 July 202X

Relevant facts and circumstances

You own a commercial property (the property).

You acquired the property in June 201X.

You are the 100% shareholder of the company, which operated its business from the property.

The property was utilised as a warehouse by the company from August 201X until the property was sold in the 202X-2X financial year.

You satisfied the maximum net asset value test at the time the property was sold.

At time of sale, you were under 55 years old.

You intend to apply the small business roll-over.

If you do not find a replacement asset in the allocated time, you will contribute the exempt amount up to $500,000 into a complying superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 115-A

Income Tax Assessment Act 1997 Subdivision 115-B

Income Tax Assessment Act 1997 section 115-100

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 section 152-205

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 Subdivision 152-E

Question 1

Under section 115-10 of the Income Tax Assessment Act 1997 (ITAA 1997), to qualify for the 50% general discount a capital gain must be made by an individual, a complying superannuation entity, a trust or a life insurance company. The capital gain must result from a capital gains tax (CGT) event happening after 11:45am on 21 September 1999 and must not have an indexed cost base. Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event.

Application to your circumstances

In your case you are an individual that made a capital gain resulting from the sale of your property after 21 September 1999. You held your property for more than 12 months before the CGT event occurred. Therefore, you are entitled to the 50% general discount under Division 115-A of the ITAA 1997 to reduce the capital gain made on the disposal of the property.

Question 2

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. Division 152-C of the ITAA 1997 applies the small business 50% active asset reduction provided the basic conditions are satisfied.

The basic conditions are as follows:

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

•                     the event would have resulted in a gain

•                     the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

•                     at least one of the following applies

-        you are a small business entity for the income year

-        you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

-        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, or

-        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.

Active asset test

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 test period, 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 test period.

The test period beings when you acquired the asset and 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 - the cessation of the business.

Connected entities

Subsection 328-125(2)(b) of the ITAA 1997 sets out the requirements for direct control of an entity other than a discretionary trust.

You control a company if you, your affiliates, or you together with your affiliates, have either:

•                     shares and other equity interests (or the right to acquire them) in the company that give you and/or your affiliates at least 40% (the control percentage) of the voting power in the company

•                     interests (or the right to acquire them) with the right to receive at least 40% (the control percentage) of any income or capital the company distributes.

Application to your circumstances

In this case, you sold a property and made a capital gain. Further, you satisfied the maximum net asset value test at the time of the sale.

You are connected with the company as you are the sole shareholder of the company. The property has been used in the course of carrying on a business by the company, your connected entity, for more than half the ownership period. Therefore, the property is an active asset per section 152-40 of the ITAA 1997 and satisfies the active asset test.

Accordingly, you satisfy the basic conditions and by extension the eligibility criteria required to access the small business 50% reduction.

Question 3

Subdivision 152-E of the ITAA 1997 contains the provisions regarding small business roll-over relief. Under sections 152-410 and 152-415 of the ITAA 1997, the small business roll-over relief allows entities that satisfy the conditions in Subdivision 152-A of the ITAA 1997 to defer all or part of each capital gain arising from a CGT event happening to an active asset.

You must acquire a replacement asset within the replacement asset period. This period starts one year before and ends two years after the last CGT event in the income year for which you obtain the roll-over.

Application to your circumstances

In your case you sold the sold the property in the 2022-23 financial year. As discussed at question 2, you satisfy the basic conditions and are therefore eligible for the small business roll-over. You will have until X to find a replacement asset.

Question 4

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.

CGT event J5

CGT event J5 happens if you choose to obtain a roll-over, and by the end of the replacement asset period:

•                     you have not acquired a replacement asset, and have not made a capital improvement to an existing asset

•                     the replacement or capital improved asset is not your active asset (for example, you sold it, it became your trading stock, or it's no longer used in the business).

Consequences of CGT event J5

When CGT event J5 happens, you make a capital gain equal to the amount of the capital gain previously disregarded under the small business roll-over.

The time of the event is at the end of the replacement asset period.

A capital gain from CGT event J5 may be eligible for the small business retirement exemption if you meet the relevant conditions. You don't need to meet the basic eligibility conditions again, but you must meet the small business retirement exemption conditions.

However, you can't apply the CGT discount, small business 50% active asset reduction, or the small business 15-year exemption to reduce this gain.

Application to your circumstances

In this case, if you unable to find a replacement asset within the relevant period CGT event J5 event will occur. You don't have to meet the basic conditions again but you must meet the retirement exemption conditions. As you are under 55 years there is a requirement to pay the exempt amount into a complying superannuation fund or RSA.

You can choose to apply the retirement exemption and reduce the capital gain made if CGT event J5 occurs. Note there is a retirement exemption lifetime limit of $500,000. You should keep a written record of the amount you choose to disregard.