Edited version of private advice

Authorisation Number: 1052408161093

Date of advice: 15 June 2025

Ruling

Subject: Small Business CGT concessions

Question 1

Is the taxpayer eligible to use any of the small business CGT concessions in Division 152 to disregard all or part of the capital gain made from the sale of a commercial property?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commenced on:

X/XX/20XX

Relevant facts and circumstances

1.            The taxpayer (X) and his spouse (Y) formed a tax law partnership (the Partnership) in the 20XX income year. The Partnership does not have a partnership agreement.

2.            X is over 55 years old. He did not carry on a business in his own individual capacity in the 20XX income year.

3.            The Partnership did not carry on a business but owned a commercial property which was acquired in the 20XX income year.

4.            The Building comprised several rooms.

5.            The Building was leased to a related company (the Company) for a number of years.

6.            The Company was incorporated in the 20XX income year and carried out its business in the Building for the entirety of the lease period^.

7.            X and Y are both Directors of the Company with X appointed upon incorporation and Y added shortly after incorporation.

8.            X and Y controlled the operations of the Company and are affiliates as they signed off on all decisions as they controlled the entity.

9.            X provided services and Y undertook administration/compliance duties for the Company.

10.          The Building was used almost exclusively by the employees of the Company, other than a third party contractor who paid to use a room for one day a week and reception services.

11.          X and Y did not have any control over the third party contractor business and did not direct any of their operations.

12.          The Partnership entered into 6-month leases for 2 rooms from the income year before selling the Building to 2 individuals.

13.          No other lease or other agreements were entered into for use of any room in the Building during the ownership period.

14.          The Company ended the previous year-to-year lease with the Partnership and entered into a new month-to-month lease with the Partnership on XX/XX/20XX due to the business downsizing.

15.          A contract to sell the Building was entered into with settlement happening in the 20XX income year.

16.          The Company's Annual Turnover for the previous financial year was under $2million.

17.          A trust (the Trust) was established in the 20XX income year and owned all the shares in the Company.

18.          X is the trustee of the Trust. Y is a primary beneficiary of the Trust since it was established.

19.          No amendments have been made to the Trust deed since it was established.

20.          The Trust does not carry on any business.

21.          In the income year prior to the sale of the Building, a trust distribution of more than 40% was made to Y, after 100% of all previous trust distributions were made to another family member, since the Trust was established.

22.          The other family member did not carry on any business and is not connected with or an affiliate of the Company.

23.          X has not previously made any claim against the lifetime limit of $500,000 for the retirement exemption.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

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

Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(i)

Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(ii)

Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(iii)

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

Income Tax Assessment Act 1997 paragraph 152-10(1)(d)

Income Tax Assessment Act 1997 subsection 152-10(1A)

Income Tax Assessment Act 1997 paragraph 152-10(1A)(a)

Income Tax Assessment Act 1997 paragraph 152-10(1A)(b)

Income Tax Assessment Act 1997 paragraph 152-10(1A)(c)

Income Tax Assessment Act 1997 paragraph 152-10(1A)(d)

Income Tax Assessment Act 1997 subsection 152-10(1B)

Income Tax Assessment Act 1997 subsection 152-10(1AA)

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-35(1)

Income Tax Assessment Act 1997 paragraph 152-35(1)(a)

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997 subsection 152-40(1)

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 section 152-200

Income Tax Assessment Act 1997 section 152-205

Income Tax Assessment Act 1997 section 152-210

Income Tax Assessment Act 1997 Subdivision 152-D

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

Income Tax Assessment Act 1997 paragraph 152-305(1)(a)

Income Tax Assessment Act 1997 paragraph 152-305(1)(b)

Income Tax Assessment Act 1997 paragraph 152-305(1)(c)

Income Tax Assessment Act 1997 section 152-320

Income Tax Assessment Act 1997 Subdivision 152-E

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 subsection 328-115(1)

Income Tax Assessment Act 1997 subsection 328-115(2)

Income Tax Assessment Act 1997 subsection 328-115(3)

Income Tax Assessment Act 1997 subsection 328-120(2)

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 subsection 328-125(1)

Income Tax Assessment Act 1997 paragraph 328-125(2)(b)

Income Tax Assessment Act 1997 subsection 328-125(3)

Income Tax Assessment Act 1997 subsection 328-125(4)

Income Tax Assessment Act 1997 subsection 328-125(7)

Income Tax Assessment Act 1997 section 328-130

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Question

Is the taxpayer eligible to use any of the small business CGT concessions in Division 152 to disregard all or part of the capital gain made from the sale of a commercial property?

Summary

The taxpayer is eligible to use the small business 50% reduction and retirement exemption in Division 152 as he met all the basic conditions in subsection 152-10(1) and has not used any of the lifetime limit of $500,000 previously.

Reasons for decision

1.            Division 152 provides 4 small business CGT concessions. These are the small business:

(a)          15-year exemption

(b)          50% reduction

(c)           retirement exemption, and

(d)          roll-over.

2.            Subdivision 152-A sets out the basic conditions that an entity must satisfy before being entitled to any of the small business CGT concessions.

The 'basic conditions'

3.            The basic conditions are outlined at subsection 152-10(1) as follows:

(a)          A CGT event happens in relation to a CGT asset of yours in an income year;

Note: This condition does not apply in the case of CGT event D1: see action 152-12.

(b)          the event would (apart from this Division) have resulted in the 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 CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

                                                (iv)          the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the asset in the income year;

(d)          the CGT asset satisfied the active asset test (see section 152-35).

Note: This condition does not apply in the case of CGT event D1: see action 152-12.

4.    When the Partnership entered a contract to sell the Building to a third party, CGT event A1 happened under section 104-10. As a result of this event happening, X made a capital gain (or would have apart from Division 152) in respect of his interest in the partnership asset. Accordingly, the first 2 basic conditions in subsection 152-10(1) are satisfied.

5.    Neither X nor the Partnership is a small business entity, as neither carry on a business in the current income year. Therefore, neither of the conditions in subparagraph 152-10(1)(c)(i) or (iii) apply. You advised that X satisfies the maximum net asset value test in section 152-15, but did not provide any evidence to prove this condition. Instead, X is seeking to rely on the condition in subparagraph

6.    152-10(1)(c)(iv), that requires satisfying the conditions mentioned in subsection 152-10(1A) or (1B).

7.    For subsection 152-10(1B) to apply requires, amongst other things, the Partnership to have been a 'CGT small business entity', which, as advised above it does not. Given the Building is not used directly in a business carried on by the Partnership, subsection 152-10(1B) is not applicable. It therefore requires consideration whether the conditions in subsection 152-10(1A) are satisfied.

Subdivision 152-10(1A): Passively held assets - affiliates and entities connected with you

8.    Subsection 152-10(1A) states:

The conditions in this subsection are satisfied in relation to the *CGT asset in the income year if:

(a)          your *affiliate, or an entity that is *connected with you, is a *CGT small business entity for the income year; and

(b)          you do not carry on a business in the income year (other than in partnership); and

(c)          if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

(d)          in any case - the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph

(e)          152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.

Affiliate - section 328-130

9.    Under section 328-130, an individual or company is considered an affiliate of yours if they act, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.

10.  Whilst X and Y are said to have controlled the operations of the Company and signed off on all decisions of the Company, X does not carry on a business in his own capacity. Therefore, X cannot be an affiliate of the Company.

Connected - section 328-125

11.  Subsection 328-125(1) states:

An entity is connected with another entity if:

(a)          either entity controls the other entity in a way described in this section; or

(b)          both entities are controlled in a way described in this section by the same third entity.

12.  To determine if X controls the Company requires consideration of paragraph 328-125(2)(b). An entity is taken to control a company if it, alone or together with its affiliates, holds at least 40% of:

(a)          the voting power in the company

(b)          the right to receive income from the company, or

(c)           the right to receive capital from the company.

13.  As the Trust owns 100% of the shares in the Company, it is taken to control the Company under paragraph 328-125(2)(b).

14.  In subsection 328-125(3), an entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates, or the first entity together with its affiliates.

15.  As X is the trustee of the Trust, the Trust is expected to act in accordance with his directions. As X controls the Trust, it is a connected entity with him under subsection 328-152(3).

16.  Under subsection 328-125(7), if the first entity controls another entity (second entity), it is also treated as controlling any entity that the second entity controls.

17.  As X controls the Trust (under subsection 328-125(3)) and the Trust controls the Company (under paragraph 328-125(2)(b)), X is taken to control the Company and is therefore connected with the Company under subsection 328-125(7).

18.  To determine whether the final part of the condition in paragraph 152-10(1A)(a) is satisfied requires ascertaining if the Company is a 'CGT small business entity'.

19.  Subsection 152-10(1AA) states:

You are a CGT small business entity for an income year if:

(a)          you are a *small business entity for the income year; and

(b)          you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

20.  The definition in section 328-110 of a 'small business entity' requires you to carry on a business in the current income year and for your aggregated turnover for the previous year was less than $10 million and/or your aggregated turnover for the current income year is likely to be less than $10 million.

21.  The Company carried out the business operation in the Building for the entirety of the lease period. Therefore, the Company will satisfy the first part to be a small business entity, as it carried on a business in the current income year in which the Building was sold.

22.  To determine if the second part, to be a small business entity, is satisfied requires working out the Company's aggregated turnover. Under subsection 328-115(1), an entity's aggregated turnover for an income year is the sum of the 'relevant annual turnovers' listed in subsection 328-115(2), excluding any amounts specifically mentioned in subsection 328-115(3). An entity calculates its aggregated turnover by including the annual turnover of entities that are 'connected with' and 'affiliates' of the entity for that income year.

23.  To determine the Company's aggregated turnover for an income year, will require including its annual turnover and also the annual turnover of entities that are 'connected with' and 'affiliates' of the entity for that income year.

24.  The annual turnover of the Company, in the previous income year, was under $2 million. For the purposes of determining eligibility as a CGT small business entity in the 20XX income year, the Company may rely on the aggregated turnover for the previous income year under subsection 328-120(2).

25.  The Company does not have any affiliates, but do have entities that are connected with it, being X, Y and the Trust. As X, Y and the Trust do not carry on any business in their own capacity, there is no annual turnover to include in the Company's aggregated turnover.

26.  Therefore, the aggregated turnover for the Company for the previous income year is under the $2 million threshold. Accordingly, the Company satisfies the definition of a CGT small business entity for the 20XX income year based on the prior year aggregated turnover test. This satisfies the condition in paragraph 152-10(1A)(a).

27.  As X does not carry on a business individually or in partnership, then the conditions in paragraphs

28.  152-10(1A)(b) and (c) are satisfied.

29.  The final condition in paragraph 152-10(1A)(d) is satisfied as the Company carried on a business at the relevant time.

30.  Therefore, as all the conditions in subsection 152-10(1A) are satisfied, the condition in subparagraph

31.  152-10(1)(c)(iv) is also met.

Active Asset Test - section 152-35

32.  The final basic condition in paragraph 152-10(1)(d) to determine is whether the asset (the Building) satisfies the active asset test in section 152-35.

33.  A CGT asset satisfies the active asset test if:[1]

(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 period specified in subsection, 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 7 1/2 years during the period specified in

34.  The period begins when you acquired the asset. It 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 or any longer period that the Commissioner allows - the cessation of the business.[2]

35.  Subsection 152-40(1) states:

A CGT asset is an active asset at a time if, at that time:

(a)          you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

                                                  (i)          you; or

                                                 (ii)          your affiliate; or

                                                (iii)          another entity that is connected with you; or

(b)          if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

36.  The Building was leased and used by the Company to carry out the business operation for the lease period. X has an ownership interest in the Building, as it was owned by the Partnership in which he is a partner. The Building was used by the Company in carrying on its business. As previously established, the Company is 'connected with' X. Therefore, the Building is an active asset, as the condition in paragraph 152-40(1)(a) is satisfied.

37.  X had an ownership interest in the Building for approximately XX years. To pass the active asset test, the Building must have been an active asset for a total of at least half of this time.[3]

38.  From the information provided, the Building was an active asset for more than half the period of ownership. Therefore, the condition is paragraph 152-35(1)(a) is satisfied that will result in the active asset test being passed.

39.  With the active asset test being passed will result in all the basic conditions in subsection 152-10(1) being satisfied.

Small business CGT concessions

40.  The sale of the Building will result in X making a capital gain in the 20XX income year. In determining the amount of capital gain to be included in X's 20XX income tax return will require working out the net capital gain using the method statement in subsection 102-5(1). This will include taking into account any current and unapplied capital losses from earlier years, reducing this net amount by the 50% CGT discount and finally applying any of the small business CGT concessions in Subdivisions 152-C, 152-D and 152-E that apply.

41.  Section 152-200 states that Subdivision 152-C explains how to apply the small business CGT concessions:

•                     a capital gain is reduced by 50% if the basic conditions in Subdivision 152-A are satisfied

•                     if the gain has been reduced by the CGT discount in Division 115, the 50% reduction under Subdivision 152-C applies to the reduced gain

•                     the gain may be further reduced by the retirement exemption in Subdivision 152-D or the roll-over in Subdivision 152-E (or both)

•                     alternatively, the taxpayer may choose not to apply the 50% reduction and instead apply the small business retirement exemption or small business roll-over, and

•                     none of the rules apply if the 15-year exemption already applies to the gain.

42.  To be eligible to claim the 50% reduction under Subdivision 152-C only requires X to pass the basic conditions.[4] As all the basic conditions in Subdivision 152-A are satisfied, X is eligible to access the 50% reduction.

43.  Under the retirement exemption, an individual can choose to disregard all or part of a capital gain under subsection 152-305(1) if:

(a)          the basic conditions in Subdivision 152-A are satisfied for the gain; and

(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.

44.  As X is over the age of 55, the conditions in paragraphs 152-305(1)(b) and (c) are not applicable. Accordingly, only the condition in paragraph 152-305(1)(a) needs to be satisfied, which requires the basic conditions in Subdivision 152-A to be satisfied.

45.  As X has satisfied all the basic conditions in Subdivision 152-A, he is eligible to use the retirement exemption lifetime limit of $500,000 to disregard all or part of the capital gain made from the sale of the Building under section 152-320. X has not accessed any of the lifetime limit previously.

46.  Under section 152-210, X is eligible to access the 50% reduction ahead of the retirement exemption.

47.  X is not seeking to use either the roll-over or the 15-year exemption.

[1] Subsection 152-35(1)

[2]Subsection 152-35(2)

[3] Paragraph 152-35(1)(a)

[4] section 152-205