Edited version of private advice

Authorisation Number: 1052236527485

Date of advice: 27 March 2024

Ruling

Subject: CGT - small business concessions

Question

Will you qualify for the small business 15-year exemption under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the sale of the property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2022

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

In 20XX, you acquired a property (the property).

Since its acquisition until 20XX, the property was used by a company (the company) in the course of carrying on a business.

Since its acquisition until 20XX, the property was also used by a partnership (the partnership) in the course of carrying on another business.

The partners in the partnership consisted of you and your spouse, each with a 50% share in the partnership.

You own 50% of the shares in the company.

The partnership and the company ceased all business activities in 20XX as a result of the separation of you and your spouse, and are now in the process of winding down, selling excess assets in 20XX.

The net value of all the assets owned by you, the company and the partnership are less than $X million.

In 20XX, the property was sold in the course of the separation, resulting in a capital gain.

You were over 55 years of age at the time of the sale of the property.

Following the sale of the property, you significantly reduced your working hours, working in a very limited capacity and have effectively now retired.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-35(1)

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

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 subsection 328-125(1)

Income Tax Assessment Act 1997 paragraph 328-125(2)(a)

Reasons for decision

Small business concessions - 15-year exemption

Section 152-105 of the ITAA 1997 provides that you can disregard any capital gain arising from a CGT event if the following conditions are satisfied:

1. the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied;
2. you continuously owned the CGT asset for the 15-year period ending just before the CGT event;
3. either:
   1. you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or
   2. you are permanently incapacitated at the time of the CGT event.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

The words 'in connection with' can also apply where the CGT event occurs sometime before retirement. This type of case would depend on its own particular facts, and would need to be considered on a case-by-case basis. It is possible that the CGT event could occur either in anticipation of, or after, the retirement. While it may be a question of fact, the essential element will be to demonstrate that the CGT event happens as part of an actual retirement plan.

Basic conditions for relief

The basic conditions for small business CGT relief, as set out in subsection 152-10(1) of the ITAA 1997 are:

1. a CGT event happens in relation to a CGT asset of yours in an income year
2. the event would (apart from this Division) have resulted in a gain
3. at least one of the following applies:

1. you are a small business entity for the income year;
2. you satisfy the maximum net asset value test;
3. 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; or
4. 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.

4.    the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Active asset test

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if:

1. 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
2. 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 test period.

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Entity connected with you

Under subsection 328-125(1) of the ITAA 1997, an entity is connected with another entity if either entity controls the other entity.

Paragraph 328-125(2)(a) of the ITAA 1997 provides that an entity controls another entity if it or its affiliate (or all of them together):

• owns, or has the right to acquire ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) 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 or
  • if the other entity is a company, owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company

Application to your circumstances

In this case, the property was sold approximately X years after your acquired it, which is a CGT event that resulted in a capital gain. Prior to being sold, the property was used in the course of carrying on a business by the company, as well as another business by the partnership for approximately X years. You own a 50% interest in both the partnership and the company. Therefore, you will be taken to be in control of the company and partnership and thus connected to the company and partnership.

Furthermore, as the net value of all the assets owned by you, the partnership and the company are less than $X million, you will also satisfy the maximum net asset value test.

Since you owned the property for more than 15 years and it was used as an active asset by entities connected to you for over 7½ years, the property will satisfy the active asset test. Therefore, you will satisfy the basic conditions for small business relief under subsection 152-10(1) of the ITAA 1997.

As outlined above, you owned the property for approximately X years prior to its sale. Moreover, after selling the property, you significantly reduced your working hours and both the company and the partnership began the process of wounding down, selling excess assets. This demonstrates that the sale of the property happened as part of an actual retirement plan. Therefore, on the facts of the case, the sale of the property happened in connection with your retirement.

Thus, as you were over the age of 55 at the time of the sale pf the property, you will qualify for the small business 15-year exemption under section 152-105 of the ITAA 1997 in relation to the sale of the property.