Edited version of private advice

Authorisation Number: 1052247529946

Date of advice: 2 May 2024

Ruling

Subject: CGT - small business 15 year exemption

Question

Is the capital gain from the sale of the property exempt from capital gains tax (CGT) as a result of the application of the small business 15 year exemption in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You are the registered proprietor of property known as parcel A and parcel B (the property)

You inherited the property in 20XX.

Parcel A totals X hectares in size and are contiguous with parcel B which is X hectares in size.

In 20XX, you entered into contracts of sale for parcel A and parcel B with settlement in X years.

Deposits totalling $X were paid in the 20XX income year and further deposits of $X are payable in the 20XX income year.

You also own X parcels of land of approximately X hectares which is not under contract. One of the parcels contains your home.

You have been carrying on a business since 19XX. You carried on the business on the property since you inherited the property in 20XX.

In the 20XX income year you entered into a lease over the property for a X year term.

The lease was entered into as part of the decision to sell the property, which you saw as a significant step towards your retirement. The intention is the property will remain under lease until the sale of the property is settled.

The lease is also over other property you and a connected entity own.

The business was carried on both the property under contract and other property owned.

Prior to the decision to sell the property, you worked X hours per week in the business. This has reduced to X hours per week.

You provided details of the activities you undertake in the business.

You also run a second business through company A and you spend X hours per week attending to this business.

The annual turnover from both businesses was less than $2 million in the years ended 30 June 20XX and 30 June 20XX.

Since 20XX you have gradually decreased your stock numbers in the business and plan to reduce the stock numbers further over the next X years.

The decision to contract to sell the property is part of your decision to reduce your asset holding and wind down the business in order to retire.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-105

Reasons for decision

Section 152-105 of the ITAA 1997 provides a small business 15-year exemption for individuals. Under this section, you can disregard the capital gain from the disposal of a CGT asset if you:

(a)          satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions

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

(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; and

(d)          you are:

(i)           at least 55 years old at that time and the event happened in connection with your retirement, or

(ii)           permanently incapacitated at that time.

In connection with retirement

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.

Application to your circumstances

In your case, a CGT event occurred when you entered into the contracts to dispose of the property in the 20XX income year and the event will result in a capital gain.

You carried on a business on the property and your aggregated turnover was less than $2 million in the 20XX income year.

You have owned the property for more than 15 years and have carried on the business on the property from 20XX up to the day you leased the property. You have carried on business on the property for more than the required 7.5 years. Therefore you meet the basic conditions in Subdivision 152-A of the ITAA 1997.

You were over the age of 55 at the time you entered into the contract to sell your property.

You have significantly reduced your hours in the business and have significantly reduced your stock on hand.

In relation to the other business, you continue to be a director and shareholder in the company. However, you do this on a part-time basis averaging only X hours a week. The business is relatively small and you do not intend to increase your involvement post contracting to sell the property.

You have no intention of commencing any other business or paid employment since contracting to sell the property.

It is considered that the sale of the property has occurred in connection with your retirement and you are eligible to claim the 15 year exemption under section 152-105 of the ITAA 1997.