Edited version of private advice

Authorisation Number: 1052339562271

Date of advice: 9 December 2024

Ruling

Subject: CGT - small business 15-year exemption

Question 1

Are you entitled to apply the small business 15-year exemption in section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard your share of the capital gain made on the disposal of the Property?

Answer

No.

Question 2

Are you entitled to apply the small business retirement exemption in section 152-305 of the ITAA 1997 to disregard your share of the capital gain made on the disposal of the Property?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2024

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

You acquired the Property jointly with your spouse.

Your spouse operated a sole trader business from the Property from soon after it was acquired for approximately X years.

A Trust then used the Property in its business until the business was sold approximately X years later.

The Trust has a corporate trustee.

Your spouse is the sole director and shareholder of the corporate trustee.

You partially retired when the business was sold and then fully retired after working part time for a couple of years.

You and your spouse received more than 40% of the distributions from the Trust when it used the Property in its business.

You sold your share of the Property and made a capital gain on the disposal.

You were over 55 when the Property was sold.

The total net value of CGT assets owned by you, entities connected with you, your affiliates and entities connected with your affiliates, does not exceed $6 million.

You have never applied the small business retirement exemption to reduce or disregard a capital gain.

If you are not eligible for the small business 15-year exemption you will make the choice to apply the small business retirement exemption to disregard all or part of the capital gain by the day you lodge your income tax return for the year ended 30 June 2024 (or within a further time allowed by the Commissioner).

You will keep a written record of the amount you choose to disregard under the small business retirement exemption (the CGT exempt amount).

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-47

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax assessment Act 1997 section 152-305

Reasons for decision

Question 1

Summary

It is the Commissioner's view that the disposal of the Property did not happen in connection with your retirement. The period of time between your retirement and the disposal is considered too long.

Therefore, you cannot disregard your share of the capital gain made on the disposal of the Property under section 152-105 of the ITAA 1997.

Detailed reasoning

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 made on the disposal of a CGT asset if you:

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

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

(c)     are at least 55 years old at the time of the CGT event and the event happens in connection with your retirement, or are permanently incapacitated at that time.

In your case, the basic conditions contained in Subdivision 152-A of the ITAA 1997 are satisfied because:

• a CGT event happened when you disposed of your interest in the Property
• the event resulted in a gain
• you satisfy the maximum net asset value test, and

• you owned your interest in the Property for more than 15 years and the Property was used in a business carried on by an affiliate or a connected entity for a total of at least 7½ years of your ownership period.

In addition,

• you continuously owned your interest in the Property for the 15-year period ending just before the CGT event, and

• you were at least 55 years old when you disposed of the Property.

The final condition you must satisfy to qualify for the small business 15-year exemption is that the disposal of the Property must have been 'in connection with your retirement'.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. We consider that 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 a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

A CGT event may happen in connection with your retirement irrespective of whether it happens before or after your retirement; however, your retirement must have some proximity to the CGT event. The closer the CGT event is to the retirement, the more likely the CGT event is 'in connection with your retirement'.

In your case, you fully retired a number of years prior to the disposal of your interest in the Property. While it is acknowledged that a retirement can happen sometime before or after the CGT event, there still needs to be a connection between your retirement and the disposal of your interest in the Property. You may have been considered to have retired when the business was sold, or when you ceased working part time delivering pamphlets, such that your retirement may have happened in connection with the disposal of the business, as it was at that time that the number of hours you worked was reduced and the nature of your activities changed.

It is the Commissioner's view that, due to the significant period between your retirement and the disposal of the Property, the requisite connection between the 2 events does not exist.

Therefore, you cannot disregard your share of the capital gain made on the disposal of the Property under section 152-105 of the ITAA 1997.

Question 2

Summary

You may choose to apply the small business retirement exemption after the small business 50% active asset reduction to the remaining 50% (or if the general 50% CGT discount has also been applied, the remaining 25%) of the capital gain after any capital losses have been applied.

Detailed reasoning

Subsection 152-305(1) of the ITAA 1997 provides that if you are an individual 55 years of age or over, you can choose to disregard all or part of a capital gain if the basic conditions in Subdivision 152-A are satisfied for the gain.

The choice must be made:

(a)  by the day you lodge your income tax return for the income year in which the relevant CGT event happened, or

(b)  within a further time allowed by the Commissioner (section 103-25 of the ITAA 1997), and

(c)   in a way that ensures that your CGT retirement limit [of $500,000] is not exceeded (paragraph 152-315(2)(a) of the ITAA 1997).

The amount chosen for the asset is the CGT exempt amount (subsection 152-315(3) of the ITAA 1997). The CGT exempt amount must be specified in writing (subsection 152-315(4) of the ITAA 1997).

As outlined above, you satisfy the basic conditions in Subdivision 152-A for the capital gain made on the disposal of your interest in the Property. Provided you make the choice to apply the small business retirement exemption to disregard all or part of the capital gain by the day you lodge your income tax return for the year ended 30 June 2024 (or within a further time allowed by the Commissioner) and keep a written record of the amount you choose to disregard, you may choose to apply the small business retirement exemption to the capital gain.

You may make the choice to apply the small business retirement exemption after, the small business 50% active asset reduction, that is, to the remaining 50% (or if the general 50% CGT discount has also applied, the remaining 25%) of the capital gain after any capital losses have been applied.