Edited version of private advice

Authorisation Number: 1052382127413

Date of advice: 04 April 2025

Ruling

Subject: CGT - small business concessions

Issue 1 - Income Tax

Question 1

Will the CGT calculation on the sale of the Property be based on the market value at the time of sale under section 116-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

Question 2

Can the small business retirement exemption be applied under section 152-305 of the ITAA 1997 to disregard all or part of the capital gain from the sale of the property?

Answer 2

Yes

Issue 2 - GST

Question 1

Is the sale of the property a taxable supply under section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

No

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

July 20XX

Relevant facts and circumstances

You are over 55 years old. You are not currently registered for GST and you do not carry on a business or enterprise.

You are currently retired.

You and your spouse are equal partners in a partnership (the Partnership).

You acquired a X% interest in the Property in October 20XX.

You acquired the remaining X% interest in the Property in December 20XX.

You are the sole owner of the property.

The Partnership carried on a business on the Property from March 20XX until April 20XX.

The Property was used as part of carrying on the Partnership enterprise. The Partnership claimed input tax credits for the expenses relating to the Property whilst the Partnership was registered for GST.

As of June 20XX, the Partnership is not registered for GST and ceased its enterprise.

At the time of the CGT event, the net value of assets owned by you, any entities connected with you, and any of your affiliates or entities connected with such affiliates, was approximately under $X.

The Property was valued at $X million in November 20XX.

You sold the Property to your son in February 20XX for $X million.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 116-30

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 152-305

Income Tax Assessment Act 1997, section 328-125

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

Reasons for decision

Issue 1 - Income Tax

Question 1

Detailed reasoning

The capital proceeds from a CGT event are replaced with the market value of the CGT asset that is the subject of the event if those capital proceeds are less than the market value of the asset and you and the entity that acquired the asset did not deal with each other at arm's length (subsection 116-30(2) of the ITAA 1997).

You will be treated as if you have received the market value for capital gains purposes. This is because you have received less then market value and have not dealt with your son as the buyer at arms-length.

Question 2

Detailed reasoning

Retirement exemption

An individual can choose to disregard all or part of a capital gain within the lifetime limit if the basic conditions are satisfied for the gain. The amount you choose to disregard is the exempt amount, this amount cannot exceed the CGT retirement exemption lifetime limit of $500,000 per individual.

The individual must also, if they are under 55 years old, contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund or RSA and the contribution is made either when you made the choice or when you received the proceeds.

If an individual is 55 years old or older when they make the choice to access the retirement exemption no amount needs to be paid to a complying superannuation fund or RSA even if you were under 55 years old when you received the capital proceeds (section 152-305 of the ITAA 1997).

Basic Conditions

The basic conditions in subdivision 152-A of the ITAA 1997 must be satisfied for an entity to be able to reduce its capital gains using the small business concessions.

To meet the basic conditions for relief the following must be satisfied (section 152-10 of the ITAA 1997):

•       A CGT event happens in relation to a CGT asset of yours in an income year

•       The event would have resulted in a gain

•       At least one of the following applies:

o   You are a CGT small business entity for the income year.

o   You satisfy the maximum net asset value test.

o   You are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership.

o   The conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year.

•       The CGT asset satisfies the active asset test.

Maximum net asset value test

The maximum net asset value test is satisfied if just before the CGT event the sum of CGTassets owned by you, any entities connected with you and any of your affiliates and entities connected with their affiliates does not exceed $6 million (section 152-15 of the ITAA 1997).

Active Asset

The CGT asset must satisfy the active asset in order to satisfy the basic conditions. The active asset test will be met if:

•       you have owned the CGT asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period from wen you acquired it to the time of the CGT event or the cessation of the business; or

•       you have owned the CGT asset for more than 15 years and the asset was an active asset of yours for a total of at least 7.5 years during the period specified in section 152-35(2) (section 152-35 of the ITAA 1997).

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

Used by a connected entity

An entity is connected with another entity if either entity controls the other entity, or both entities are controlled in a way described in this section by the same third section (section 328-125(1) of the ITAA 1997).

In accordance with subsection 328-125(2) of the ITAA 1997, where the other entity is a partnership, you will control it if you, your affiliates, or you together with your affiliates have the right to receive a percentage that is at least 40% of the net income of the partnership.

In your case, you were a partner in the Partnership. You did not carry on a business other than in the Partnership.

You had a 50% interest in the net income of the Partnership and was therefore directly connected to the Partnership.

At the time of the CGT event, you had a net asset value below $6 million. This includes the net value of assets owned by you, any entities connected with you and any of your affiliates and entities connected with their affiliates.

The business you carried on as a partner in the Partnership is the business that, was carried on in relation to the Property.

The X% interest in the Property was owned by you for approximately X years and X months from October 20XX until February 20XX and was used in the Partnership business for approximately X years and X months up until April 20XX.

The X% interest in the Property was owned by you for approximately X years and X months from December 20XX until February 20XX and was used in the Partnership business for approximately X years and X months up until April 20XX.

As both interests in the Property have been used directly by the Partnership for more than half the period of ownership the Property is considered to be an active asset.

You satisfy the basic conditions for the purposes of the CGT small business concessions.

You are eligible to disregard all or part of a capital gain within the lifetime limit of $500,000 as you satisfy the basic conditions and are not required to contribute an amount to a complying superannuation fund or RSA as you are over 55 years old at the time of the sale.

Issue 2 - GST

Question 1

An entity makes a taxable supply where all the requirements of section 9-5 of the GST Act are satisfied.

The Partnership ceased carrying on an enterprise and was no longer registered for GST as of 30 June 20XX. Therefore, it must be established if you, as an individual and not in the capacity of a partner in a partnership, made a taxable supply when you sold the Property.

Section 9-5 provides that you make a taxable supply if:

a) you make the supply for consideration; and

b) the supply is made in the course or furtherance of an enterprise that you carry on; and

c) the supply is connected with Australia; and

d) you are registered or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In your case, the supply of the Property has satisfied paragraphs (a) and (c). You made a supply of real property for consideration and the supply is connected with Australia. It must be determined if the supply of property is made in the course or furtherance of an enterprise that you carry on and if you are required to be registered for GST.

Supply is made in the course or furtherance of an enterprise that you carry on

The partnership enterprise must be distinguished from any enterprise that you carry on as an individual. When the Partnership enterprise ceased, any potential supply of the property in the course or furtherance of the Partnership enterprise also ceased.

As such, it must be established if the sale of the property by you is in the course or furtherance of an enterprise that you carry on.

Under paragraph 9-20 of the GST Act, an enterprise includes an activity or series of activities done 'in the form of a business'. Enterprise has a wider meaning than the concept of 'carrying on a business'.

As you do not carry on an enterprise of any kind and are retired, the supply of the Property is not made in the course or furtherance of an enterprise that you carry on. You do not satisfy paragraph (b) of Section 9-5.

Registered or required to be registered for GST

Section 23-5 of the GST Act provides that you are required to be registered if:

a) you are carrying on an enterprise; and

b) your GST turnover meets the GST registration turnover threshold.

As it was determined in section 9-5 (b) that you are not carrying on an enterprise, section 23-5 (a) also has not been satisfied and you are not required to be registered for GST.

The supply of the property does not satisfy either paragraph (b) or (d) of section 9-5 therefore is not a taxable supply.