Edited version of private advice

Authorisation Number: 1052235253535

Date of advice: 25 March 2024

Ruling

Subject: CGT - small business concessions

Question 1

Will A be entitled to applythe small business 15-year exemption in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) to the capital gain arising from the transfer of the interest in the Property that A has held since 19XX?

Answer

Yes

Question 2

Will B be entitled to applythe small business 15-year exemption in Subdivision 152-B of the ITAA 1997 to the capital gain arising from the transfer of the interest in the Property that B has held since 19XX?

Answer

Yes

Question 3

Will A be entitled to apply the 50% reduction in Subdivision 152-C of the ITAA 1997 to the capital gain arising from the transfer of the interests in the Property that A has held since 20XY and 20XZ?

Answer

Yes

Question 4

Will B be entitled to apply the 50% reduction in Subdivision 152-C of the ITAA 1997 to the capital gain arising from the transfer of the interests in the Property that B has held since 20XY and 20XZ?

Answer

Yes

Question 5

Will A be entitled to apply the small business retirement exemption in Subdivision 152-D of the ITAA 1997 to any remaining capital gain arising from the transfer of the interests in the Property that A has held since 20XY and 20XZ?

Answer

Yes

Question 6

Will B be entitled to apply the small business retirement exemption in Subdivision 152-D of the ITAA 1997 to any remaining capital gain arising from the transfer of the interests in the Property that B has held since 20XY and 20XZ?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

Date in 20XX

Relevant facts and circumstances

A, B, C, and D purchased a property on a date in 19XX for $X as joint tenants.

After the deaths of C on a date in 20XY and D on a date in 20XZ, the Property is held by A and B as joint tenants.

A and B together with C and D, as partners in E partnership, have used the Property in the relevant business since its purchase.

Due to their age and ill health A and B intend to transfer the Property to the Trustee for R Trust (the Trust) by a date in 20XX.

The E Partnership will continue with addition of the Trust as soon as possible and the Property will continue to be used in the relevant business.

This will allow A and B to transition to retirement and have less active participation in the relevant business.

A and B are both over 55 years of age.

The value of the Property was estimated to be $Y in 20XX.

The E Partnership turnover has been less than $2 million in the 20XW year. Details have been provided.

For the year ended 30 June 20XW, neither A nor B had any other business income. Details have been provided.

A and B do not carry on any business apart from that of the E Partnership.

The E Partnership does not have any other affiliates or entities connected.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 section 108-7

Income Tax Assessment Act 1997 section 128-50

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 Subdivision 328-C

Reasons for decision

This is to explain how we reached our decision. This is not part of the private ruling.

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Questions 1 and 2

Summary

A and B will be entitled to applythe small business 15-year exemption in Subdivision 152-B to the capital gain arising from the transfer of the interest in the Property that each of them has held since 19XX.

Detailed reasoning

Subdivision 152-A sets out the basic conditions for an entity to be able to reduce its capital gains using the small business concessions in Division 152.

The basic conditions are outlined in subsection 152-10(1). These conditions are:

(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).

Basic condition one

Subsection 108-5(1) provides that a CGT asset is:

(a)  any kind of property; or

(b)  a legal or equitable right that is not property.

Subsection 108-5(2) includes an interest in an asset referred to in subsection (1) as a CGT asset.

Section 108-7 provides that:

Individuals who own a CGT asset as joint tenants are treated as if they each owned a separate CGT asset constituted by an equal interest in the asset and as if each of them held that interest as a tenant in common.

A and B have each held an interest in the Property since 19XX, and each of those interests is treated as a separate CGT asset.

Section 128-50 has rules that are relevant if a CGT asset is owned by joint tenants and one of them dies. Subsection 128-50(2) states that:

The survivor is taken to have acquired (on the day the individual died) the individual's interest in the asset. If there are 2 or more survivors, they are taken to have acquired that interest in equal shares.

In relation to the interests that A and Benner each acquired when C died in 20XY and when D died in 20XZ, Taxation Determination TD 2000/31 Income tax: capital gains: if you own an interest in a CGT asset and you acquire another interest in that asset, do the interests remain separate CGT assets for capital gains purposes or do they become a single asset? explains that these interests remain separate CGT assets for capital gains purposes.

Paragraph 3 of TD 2000/3 states that:

The consequences are that on the occurrence of CGT events affecting the interests (for example CGT event A1 - about disposals of CGT assets - in section 104-10 of the Income Tax Assessment Act 1997):

(a) there is a separate date of acquisition for each interest;

(b) there is a separate cost base for each interest; and

(c) capital proceeds are determined separately for each interest.

Therefore, each of the interests in the Property held by A and B is a CGT asset.

Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

A and B intend to transfer the Property to the Trust before 30 June 20XX, which will result in the occurrence of CGT event A1.

Basic condition two

The Property has been valued at $Y and the value of the Property when it was acquired by A and B in 19XX was $X. Consequently, there would be, apart from Division 152, a capital gain on the disposal of the CGT asset.

Basic condition three

Subparagraph 152-10(1)(c)(iv) includes the option of satisfying the requirements in subsection 152-10(1B) in relation to the CGT assets. Those requirements are that:

(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)  (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.

Paragraph 152-10(1B)(a)

A and B are currently both partners in the E Partnership.

Paragraph 152-10(1B)(b)

To be considered a CGT small business entity in subparagraph 152-10(1)(c)(i), the E Partnership 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) provides that a partnership will be a small business entity for an income year (the current year) if:

(a)  it carries on a business in the current year; and

(b)  one or both of the following applies:

(i)     it carried on a business in the income year (the previous year) before the current year and its aggregated turnover for the previous year was less than $10 million; and

(ii)    its aggregated turnover for the current year is likely to be less than $10 million.

Based on section 328-115 the E Partnership's aggregated turnover includes its own annual turnover, as well as the annual turnover of any entity that is connected with it, or is an affiliate of it, at any time during the income year.

Aggregated turnover does not include amounts derived during that period

• from dealings between the partnership and entities while they are connected with it or are its affiliates
• from dealings between entities while they are connected with the partnership or are its affiliates, or
• by entities while they were not connected with the partnership and were not an affiliate of it.

Annual turnover is defined in section 328-120. Subsection 328-120(1) states:

An entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

An entity is connected with another entity if either entity controls the other entity in a way described in section 328-125 or both entities are controlled in a way described in that section by the same third entity.

Under paragraph 328-125(2)(a), an entity controls another entity, that is not a discretionary trust, if it or its affiliates, or all of them together beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive at least 40% of any distribution of income or capital by the other entity, or if the other entity is a partnership - the net income of the partnership.

Based on this A and B are both entities connected with the E Partnership.

Within the meaning in section 328-130, only an individual or a company can be an affiliate of another entity. Relevantly, an affiliate is any individual that, in relation to their business affairs, acts or could reasonably be expected to act either:

• according to the other entity's directions or wishes
• in concert with the other entity.

A and B are not affiliates of the E Partnership as they do not carry on any business apart from that of the E Partnership.

The E Partnership has no other connected entities or affiliates.

Apart from the income from the E Partnership, A and B did not have any other income in the ordinary course of carrying on a business for the year ended 30 June 20XW.

Amounts that either A or B derived in the 20XW income year from any dealings between them and the E Partnership are not included in its aggregated turnover for that year.

Consequently, the aggregate turnover for the E Partnership for the year ended 30 June 20XW is less than the $2 million threshold. Therefore, the E Partnership will be a CGT small business entity for the year ended 30 June 20XX.

Paragraph 152-10(1B)(c)

Neither A nor B carried on a business other than in the E Partnership.

Paragraph 152-10(1B)(d)

The relevant CGT assets are A's and B's interests in the Property which are not assets of the E Partnership.

Paragraph 152-10(1B)(e)

A and B own the Property and they use it in carrying on the relevant business.

The requirements of basic condition three will be satisfied as the requirements of subsection 150-10(1B) will be satisfied in relation to the CGT assets in the income year.

Basic condition four

In accordance with subsection 152-35(1):

A CGT asset satisfies the active asset test 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 7½ years during the period specified in subsection (2).

Subsection 152-35(2) provides that 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.

As is relevant, in subsection 152-40(1):

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

(a)  you 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; ...

A and B have each held an interest in the Property since 19XX, and since that time have used the Property in carrying on the relevant business as partners in the E Partnership.

They continued to use the Property to carry on the relevant business on the Property as partners in the E Partnership after they each acquired

• an additional interest in the Property since 20XY, and
• an additional interest in the Property since 20XZ.

They intend to continue to use the Property for the relevant business up to the date of the CGT event.

The CGT assets, being each interest held by A and B, will meet the active asset test, therefore basic condition four will be satisfied.

Consequently, all the basic conditions for relief under the small business CGT concessions will be satisfied for the capital gain arising from transfer of the Property.

Subdivision 152-B, the small business 15-year exemption

Section 152-105 provides that:

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.

As each of the basic conditions in subsection 152-10(1) will be satisfied, paragraph 152-105(a) will be satisfied.

Paragraph 152-105(b) is satisfied in relation to the interest held by A since 19XX and the interest in the Property held by B since 19XX, as they continuously owned that interest for more than 15 years.

Paragraph 152-105(d) is satisfied as both A and B are over 55 years of age, and they are transferring the Property in connection with their retirement.

As all the requirements of section 152-105 will be satisfied, A and B will each be entitled to apply the small business 15-year exemption to the capital gain arising from the transfer of the interest in the Property that each of them has held since 19XX.

Questions 3 and 4

Summary

A and B will be entitled to apply the 50% reduction in Subdivision 152-C to the capital gain arising from the transfer of the interests in the Property that each of them has held since 20XY and 20XZ.

Detailed reasoning

A and B will be entitled to apply the small business 50% reduction in Subdivision 152-C where the requirements in section 152-205 are satisfied:

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.

The following example is provided in the legislation:

For an individual (other than one who opts to claim indexation instead of the discount), the discount percentage that applies under step 3 of the method statement is 50%. Therefore, the combined effect of the discount percentage and this section would be to reduce the original capital gain by a total of 75%.

For an individual who opts to claim indexation, or a company, there is no discount percentage, so the individual or company would simply get the 50% reduction under this section.

As explained in the reasons for decision to questions one and two, both A and B will meet the basic conditions in Subdivision 152-A for the capital gain.

Consequently, they will each be entitled to apply the small business 50% reduction to any capital gain arising from the transfer of the interests in the Property they have held since 20XY and 20XZ.

Questions 5 and 6

Summary

A and B will be entitled to apply the small business retirement exemption in Subdivision 152-D to any remaining capital gain arising from the transfer of the interests in the Property that each of them has held since 20XY and 20XZ.

Detailed reasoning

A and B will be entitled to apply the small business retirement exemption in Subdivision 152-D if the requirements in subsection 152-305(1) are satisfied:

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 ...

As A and B will meet the basic conditions in Subdivision 152-A and neither of them is under 55 years of age, they will both satisfy the requirements of in subsection 152-305(1).

Consequently, they will each be entitled to apply the small business retirement exemption in Subdivision 152-D to any remaining capital gain arising from the transfer of the interests in the Property that each of them has held since 20XY and 20XZ.