Private ruling: Small business capital gains tax concessions
Published: November 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to apply the small business retirement exemption to the capital gain from the sale of the property? | A1: Yes.

Relevant facts and circumstances: You carry on a business and have a turnover of less than 2 million. You and your spouse purchased a commercial property. You use the property to operate a business and have done so for the entire ownership period. You are more than 55 years of age. You intend to sell the property in the 2014-15 financial year. Your share of the capital gain will be less than $500,000.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 paragraph 152-40(4)(e)

Reasons for decision: Summary: The basic conditions for the small business capital gains tax concessions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are: • the small business entity test and • the active asset test. | Detailed Reasoning - Small business entity: You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover of less than $2 million. In your case, the information provided is that business has a turnover of less than $2 million. | Detailed Reasoning - 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. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. In this case, you have owned the property for more than 15 years and it has been used in the course of carrying on a business for the entire ownership period. Therefore, the property will satisfy the active asset test. | Detailed Reasoning - Retirement exemption: 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 chose 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 (RSA). 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. In this case, as discussed above, you satisfy the basic conditions. Provided you keep a written record of the amount you chose to disregard, you are entitled to the small business retirement exemption. As you are over 55 years of age, you are not required to contribute any amount to a complying superannuation fund or RSA.