Private ruling: capital gains tax
Published: November 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Do you satisfy the basic conditions for the small business capital gains tax concessions in relation to the property sold in the 2012-13 financial year? | A1: Yes. | Q2: Are you entitled to apply the retirement exemption to the capital gain made on the sale of the property it he 2012-13 financial year? | A2: Yes.

Relevant facts and circumstances: In the 1995-96 financial year you and your ex-spouse purchased a property. This property was rented for a period of time to a residential tenant. During the 2000-01 financial year, you and your ex-spouse began renting the property to a Family Trust. You received commercial rent from the Family Trust. The Family Trust operated a business from the property. The Family Trust is a small business entity with a turnover of less than $2 million. During the 2007-08 financial year, you separated from your ex-spouse. You were legally divorced some years later. You received at least 40% of the distributions from the trust in the 2000-01, 2001-02, 2003-04, 2005-06 and 2006-07 financial years. You continued to receive rent from the family trust up until the property was vacated due to a family court order. In the 2012-13 financial year, the property was sold and you made a capital gain. You satisfied the maximum net asset value test just prior to the sale. You are over 55 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 paragraph 152-40(1)(a) | Income Tax Assessment Act 1997 subsection 328-125(4)

Reasons for decision: Summary: To qualify for the small business capital gains tax (CGT) concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. A capital gain that you make may be reduced or disregarded under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) if the following basic conditions are satisfied: § A CGT event happens in relation to a CGT asset of yours in an income year, § The event would have resulted in a gain, § The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and § At least one of the following applies; o you are a small business entity for the income year, o you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, o 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 o 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. Active asset test This test requires the CGT asset to be an active asset for: · 7½ years, if owned for more than 15 years, or · half of the ownership period if owned for 15 years or less (section 152-35 of the ITAA 1997). An asset is a considered an active asset if it is used or held ready for use in the course of carrying on a business by: · the taxpayer · the taxpayer's spouse or child under 18 years · the taxpayer's affiliate, or · an entity connected with the taxpayer (paragraph 152-40(1)(a) of the ITAA 1997). Assets which cannot be active assets The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997): · interests in a connected entity (other than those satisfying the 80% test) · shares in companies and interests in trusts (other than those satisfying the 80% test) · shares in widely held companies unless they are held by a CGT concession stakeholder of the company · shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply · financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options · an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary. 50% active asset reduction Division 152-C of the ITAA 1997 applies the small business 50% active asset reduction provided the basic conditions are satisfied. Connected with - control of a discretionary trust by a beneficiary As per subsection 328-125(4) of the ITAA 1997, the level of actual distributions made by a discretionary trust is used to determine who controls the trust. A beneficiary is taken to control a discretionary trust in an income year only if, for any of the 4 income years before that year: · the trustee paid to, or applied for the benefit of, the beneficiary or their affiliates, or both the entity and any of it's affiliates any of the income or capital of the trust, and · the amounts paid or applied were at lest 40% (the control percentage) of the total amount of income or capital paid or applied for that income year. | Detailed Reasoning - Application to your circumstances: In this case, you sold a property in the 2012-13 financial year and made a capital gain. You have stated that you satisfy the maximum net asset value test. The property was owned by you for more than 15 years and used in the course of carrying on a business by the Family Trust. For the property to be considered an active asset of yours, the Family Trust must be connected with you. As a result of the distributions you received from the Family Trust, they were a connected entity of yours for more than 7½ years during the period the asset was used by the Family Trust. As the connected entity was carrying on a business using the property for more than 7½ years, the property will satisfy the active asset test. Therefore, as you satisfy the basic conditions for the small business capital gains tax concessions you are entitled to apply the active asset reduction in Division 152-C of the ITAA 1997. | Detailed Reasoning - Question 2: Retirement exemption The rules covering the small business retirement exemption are contained in Subdivision 152-D of the ITAA 1997. If you are an individual, you can choose to disregard all or part of a capital gain if: · you satisfy the basic conditions · you keep a written record of the amount you choose to disregard (the CGT exempt amount), and · if you are under 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account. If you are 55 years old or older when you make the choice to access to retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA even though you may have been under 55 years old when you received the capital proceeds. The choice you make is evidenced by the way you prepare your income tax return for the relevant year. The amount of the capital gain that you choose to disregard 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. | Detailed Reasoning - Application to your circumstances: In your case you satisfy the basic conditions for the small business concessions and provided you keep a record of the amount you choose to disregard, you are entitled to apply the retirement exemption.