Edited version of private advice

Authorisation Number: 1052256797887

Date of advice: 17 June 2024

Ruling

Subject: CGT - small business concessions - retirement exemption

Question

Are the taxpayers eligible for the small business capital gains tax (CGT) 15-year exemption under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) on the disposal of the property?

Answer

No.

This ruling applies for the following period:

Year Ended 30 June 2021

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

The taxpayers sold their property in the 2021 financial year.

The property was acquired after September 1985.

The taxpayers lived on the property and run their business at the same time.

Between the acquirement of the property and 20XX the business side of the property was used for primary production purposes for planting produce and selling them wholesale.

The same portion of land was used between 20XX to the 20XX financial year to run the company.

The company ceased operating in the 20XX financial year.

The property sold for over $X million.

The taxpayers do not carry on a business in the CGT event year.

The taxpayers are not a partner in a partnership that is a small business entity for the CGT event year.

The taxpayers retired on the same day the property sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-105

Reasons for decision

Basic conditions

A capital gain that you make may be reduced or disregarded under Division 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) 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 have resulted in a gain

c)    at least one of the following applies;

              i.        you are a small business entity for the income year.

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

            iii.        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

           iv.        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.

d)    the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997

Active Asset Test

The active asset test is contained in section 152-35 of the ITAA 1997. Where you have owned the asset for more than 15 years, the active asset test is satisfied if the asset was an active asset of yours for a total of at least 7.5 years of the test period detailed below.

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.

Section 152-40 of the ITAA 1997 explains that a CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Small Business Entity

Subsection 328-110(1) says you are a small business entity for an income year if:

a)    you carrying on a business in the CGT event year

b)    one or both of the following applies:

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

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

Small business 15-year exemption

For the taxpayers to be eligible for the small business 15-year exemption they must satisfy the basic conditions and two further conditions:

• They continuously owned the *CGT asset for the 15-year period ending just before the CGT event;
• either:
  • you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or
  • you are permanently incapacitated at the time of the CGT event.

Application to case

In this case when the property was sold a CGT event occurred that resulted in a capital gain. The taxpayers have continuously owned the property for over 15 years, and it was used by the company for over 15 years to carry on a business. However, the basic conditions are not satisfied because:

•         as the company ceased in the income year before sale of the property, it does not satisfy paragraph 152-10(1)(c)(iv) of the ITAA 1997.

•         the taxpayers do not satisfy the maximum net value asset test in section 152-15 of the ITAA 1997 because the property value just before the CGT event was over $X million, meaning the net assets will be over $X million.

•         the taxpayers are not a small business entity in the CGT event year.

•         the taxpayers are not a partner in a partnership that is a small business entity for the CGT event year.

The taxpayers were over 55 years old when the property sold and retired as a result of the sale. However, as they don't satisfy of the basic conditions, they are not eligible for the small business 15-year exemption.