Edited version of private advice

Authorisation Number: 5010063535980

Date of advice: 15 June 2020

Ruling

Subject: Small business capital gains tax (CGT) retirement exemption

Question 1

Are you eligible for the capital gains tax (CGT) small business CGT retirement exemption on the sale of your property?

Answer

Yes

Question 2

Will the Commissioner grant you an extension of time to choose to apply the CGT small business retirement exemption to the capital gain?

Answer

Not applicable

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased the property from your family in joint names with your spouse after 19 September 1985. The total area of the property was in excess of five acres.

All the land (excluding the house and surrounding area) was designed, setup and used for the production of stock feed and supply of income for more than seven and a half years.

The property was not used in the breeding of animals.

You are both now aged over 55 years.

The property was never rented out to any third party and was not used for agistment purposes or operated by anyone else.

You sold your property to an unrelated third party.

You have never previously relied on the CGT small business retirement exemption for any capital gain you have made.

You have not lodged the return for the financial year you sold your property pending the decision in this private ruling. You have both signed an election for choice to apply the small business retirement exemption.

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 152-300

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 section 152-310

Income Tax Assessment Act 1997 section 152-315

Income Tax Assessment Act 1997 section 152-320

Reasons for decision

Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are:

(a) a CGT event happens in relation to a CGT asset in an income year.

(b) the event would have resulted in the 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 asset of the partnership or

   iv.        the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.

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

To be eligible to apply the small business CGT concessions you must satisfy all four of the basic conditions above.

Maximum net asset value test

Under section 152-15 of the ITAA 1997:

you satisfythe maximum net asset value test if, just before the *CGT event, the sum of the following amounts does not exceed $6,000,000:

b.     the net value of the CGT assets of any entities *connected with you;

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if:

·         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 detailed below, or

·         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 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

Small Business Retirement exemption

If you satisfy the conditions within Subdivision 152A of the ITAA 1997 and are under 55 years of age, you can make the choice to access the retirement exemption. You must pay an exempt amount into a complying superannuation fund or RSA. If you're 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying super fund or RSA, even though you may have been under 55 years old when you received the capital proceeds.

The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) must not exceed your CGT retirement exemption limit. An individual's lifetime CGT retirement exemption limit is $500,000 reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. This includes amounts disregarded under former (repealed) retirement exemption provisions.

Application to your circumstances

You owned the property for over XX years. The property was used for the production of stock feed.

As you owned the property and used it in the production of stock feed for at least XX years, the property was an active asset.

When you sold the property a CGT event A1 occurred which resulted in a gain. You satisfied the maximum net asset value test. You owned the property for over XX years, and the property was an active asset of yours for at least XX years. You have therefore satisfied all four of the basic conditions above.

You and your spouse were over 55 years of age at the time of the CGT event. Therefore, there is no requirement to pay any amount to a complying super fund or RSA to meet the requirements of the small business CGT retirement exemption.

Extension of time to make a choice

You must make a choice by the time you lodge your tax return for the financial year in which the CGT event happens (section 103-25 of the ITAA 1997). The way the tax return was prepared is evidence of making a choice. However, one exception is the small business CGT retirement exemption where the choice has to be made in writing.

A taxpayer who has considered the application of the CGT concessions and chosen a particular concession has made a choice which cannot later be changed. However, a taxpayer who did not consider the CGT concessions and accordingly included a capital gain in their income tax return has not made a choice and can, if the Commissioner allows further time, later make a choice for a CGT concession and amend their return to reduce or disregard the capital gain.

The general rule is that you must make a choice to defer or roll over your capital gain by the day you lodge the tax return for the year in which the relevant CGT event happened. The way you prepare your tax return is sufficient evidence of the choice. In your case, as you haven't lodged your tax return for the financial year but you have made the choice for the small business retirement exemption in writing, Question 2 is not applicable. You do not require an extension of time to make a choice.