Edited version of private advice

Authorisation Number: 1052255618436

Date of advice: 12 June 2024

Ruling

Subject: CGT - retirement exemption

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

Question

Can you and your spouse choose to apply the small business retirement exemption in Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) to the gain arising from the sale of the property?

Answer

Yes. You and your spouse can choose to disregard all, or part of the capital gain up to the $500K lifetime limit from the sale of the property under the small business retirement exemption in Subdivision 152-D as the basic conditions in subsection 152-10(1) will be satisfied. A CGT event will occur when the property is sold, which will result in a capital gain. You and your spouse will be a partner in a partnership that is a CGT small business entity. The active asset test under section 152-35, is satisfied, the asset was used by the partnership to operate your primary production business and you have owned the property for less than 15 years and it was an active asset for over half of the ownership period.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The title for the property was originally issued to the previous owner as a grant under the War Service Land Settlement Act 1950.

Section 17 of the War Service Land Settlement Act 1950 (Tas) describes the settlement grants as a holding that is to be held forever (long-term lease).

You and your spouse leased the property in joint names as an Estate in Fee Farm.

Several years later you and your spouse acquired the title of the property Freehold and a letter was issued from The Department of State Growth confirming the receipt of the final payment of the option price for you to freehold the property.

You and your spouse ran a primary production partnership on the entire property since the acquisition of the long-term lease over 30 years ago and it is still running today.

The title contains a dwelling, which has been let in the past and a small fee for maintenance was received, but no fees have been received since 19XX.

The partnership had an aggregated turnover of less than $2 million in the 20YY-YY financial year.

The partnership will have an aggregated turnover of less than $2 million in the 20YY-YY financial year.

You and your spouse are both over the age of 55 and would like to sell the property and retire from the partnership.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 109

Income Tax Assessment Act 1997 Subdivision 152-A

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

Income Tax Assessment Act 1997 section 152-10(1)(c)(iv)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 subsection 152-305(1)

Reasons for decision

Basic conditions for relief

The basic conditions for relief under the CGT small business concessions are outlined in Subdivision 152-A.

Subsection 152-10(1) provides that a capital gain you make may be reduced or disregarded if the following basic conditions are satisfied:

(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 a 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 small business entity for the income year and the CGT asset is an asset of the partnership;

            (iv)      you do not carry on a business, but your CGT asset is used in a business carried on by a CGT small business entity that is your affiliate, or an entity connected with you;

(d)          the CGT asset satisfies the active asset test in section 152-35.

Passively held assets - partnerships

For subparagraph 152-10(1)(c)(iv) of the ITAA 1997 to apply the conditions mentioned in subsection 152-10(1A) or (1B) must be satisfied in relation to the CGT asset in the income year. Subsection 152-10(1A) of the ITAA 1997 is not relevant in this case. Subsection 152-10(1B) is discussed below.

The conditions in subsection 152-10(1B) of the ITAA 1997 will be satisfied as:

(a)          you will be a partner in a partnership in the income year in which the property will be sold; 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 property is not an interest in an asset of the partnership; and

(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, will carry on (as referred to in subparagraph 152-40(1)(a)(i) or paragraph 152-40(1)(b)) in relation to the property.

Active asset

For the sale of the property to qualify for the CGT small business concessions, it must satisfy the active asset test.

Under subsection 152-35(1), a CGT asset will satisfy 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 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 7½ years during the test period.

Subsection 152-40(1) 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.

Retirement Exemption

Subsection 152-305(1) provides that 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;

(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.

If you are 55 years 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.

Application to your circumstances

A CGT event will occur when you and your spouse sell the property which will result in a capital gain. You and your spouse are not a small business entity however you are a partner in the partnership, which is a small business entity, operating a primary production business with a turnover of less than $2 million. Therefore, satisfying the condition under paragraph 152-10(1)(c)(iv) of the ITAA 1997.

You and your spouse leased the property over 30 years ago as an estate in fee farm which was later converted to a freehold title, you and your spouse have held the property as freehold for less than 15 years and the property was used in the course of carrying on the primary production business by the partnership for more than half of the ownership period. Therefore, the property satisfies the active asset test under section 152-35 of the ITAA 1997.

You and your spouse will satisfy all the requirements for the basic conditions for relief in Subdivision 152-A for the sale of the property. You and your spouse will be over the age 55 years 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. Therefore, the requirements for the retirement exemption in paragraph 152-305(1)(a) will be satisfied. You and your spouse are entitled to choose to apply the small business CGT retirement exemption as the required conditions under subsection 152-305(1) are satisfied.