Private ruling: Small business capital gains tax concessions
Published: November 2014
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to apply the small business rollover concession to the capital gain on the sale of the property? | A1: Yes. | Q2: If you fail to acquire a replacement asset by the end of the replacement asset period, are you entitled to apply the small business retirement exemption to the capital gain? | A2: Yes. | Q3: If you are over 55 years of age when you make the choice to apply the small business retirement exemption are you required to contribute the exempt amount to a complying superannuation fund? | A3: No.

Relevant facts and circumstances: You and your spouse purchased a commercial property. Your spouse carries on a business with a turnover of less than $2 million. You do not carry on a business. Your spouse has used the property to operate a business for the entire ownership period. You are less 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 Division 152 | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 paragraph 152-10(1)(c) | Income Tax Assessment Act 1997 subsection 152-10(1A) | Income Tax Assessment Act 1997 subsection 152-10(1B) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subparagraph 152-40(1)(a)(ii) | Income Tax Assessment Act 1997 subparagraph 152-40(1)(a)(iiI) | Income Tax Assessment Act 1997 paragraph 152-40(1)(b) | Income Tax Assessment Act 1997 paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 subsection 152-47(1) | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Summary: In order to access the small business concessions contained in Division 152 of the ITAA 1997, the basic conditions contained in section 152-10 of the ITAA 1997 (in addition to any conditions relevant to each specific concession) must be satisfied. One of the basic conditions (paragraph 152-10(1)(c) of the ITAA 1997) requires that at least one of the following applies: • you are a small business entity (SBE) for the income year • you satisfy the maximum net asset value test • you are a partner in a partnership that is a SBE for the income year and the capital gains tax (CGT) asset is an interest in an asset of the partnership; or • the conditions mentioned in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year that the CGT event occurs; | Detailed Reasoning - Passively held assets: Section 152-10(1A) of the ITAA 1997 provides: 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 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 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 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset. An SBE is an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover of less than $2 million. | Detailed Reasoning - Affiliate: An affiliate is, according to section 328-130 of the ITAA 1997, an individual or a company who acts, 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. A spouse or a child under the age of 18 years is not automatically an affiliate. Whether a person acts, or could reasonably be expected to act, in accordance with the taxpayer's directions or wishes, or in concert with the taxpayer is a question of fact dependent on all the circumstances of the particular case. No one factor will necessarily be determinative. However subsection 152-47(1) of the ITAA 1997 applies to deem a spouse or child an affiliate of an entity if: • one entity (the asset owner) owns a CGT asset (whether the asset is tangible or intangible); and • either: • the asset is used, or held ready for use, in the course of carrying on a business in an income year by another entity (the business entity); and • the asset is inherently connected with a business that is carried on in an income year by another entity (the business entity);and • the business entity is not (apart from this section) an affiliate of, or connected with, the asset owner. Under subsection 152-47(2) of the ITAA 1997, in determining whether the business entity is an affiliate of, or is connected with, the asset owner, a spouse or child of the individual is taken to be an affiliate of an individual. If an entity is an affiliate of another entity as a result of subsection 152-47(2) of the ITAA 1997, then the spouse or child is, in addition, taken to be an affiliate of the individual for the purposes of section 328-125 of the ITAA 1997. The application of section 152-47 of the ITAA 1997 is not limited to situations where an entity that owns a CGT asset and does not operate a business provides that asset to another entity for use in its business (the standard passively held asset). It also applies to situations where an entity that operates a business owns a CGT asset that it provides to another entity for use in that other entity's business. | 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. | Detailed Reasoning - Application to your circumstances: In this case, you own a portion of a property which has used in the business of your spouse for the entire ownership period. Therefore, under subsection 152-47(2) of the ITAA 1997, you will be deemed to be an affiliate of your spouse. You do not carry on a business; however, your spouse (who is also your affiliate) carries on a business with a turnover of less than $2 million. We consider that the basic conditions set out in section 152-10(1A) of the ITAA 1997 have been satisfied. As the property has been used in the course of carrying on a business by your affiliate for the entire ownership period it will also satisfy the active asset test. | Detailed Reasoning - Small business rollover: To qualify for the small business rollover, you need to satisfy the basic conditions that apply to all the CGT small business concessions. If you choose the rollover, the capital gain will not be included in your assessable income. Further CGT events happen if you previously chose the rollover and certain conditions are not met by the end of the replacement asset period. This period starts one year before and ends two years after the last CGT event that occurs in the income year for which you choose the rollover. CGT event J5 happens if you choose to obtain a rollover, and by the end of the replacement asset period you have not acquired a replacement asset, and have not made a capital improvement to an existing asset. When CGT event J5 happens, you make a capital gain equal to the amount of the capital gain previously disregarded under the small business rollover. The time of the event is at the end of the replacement asset period. A capital gain from CGT event J5 may be eligible for the retirement exemption if you meet the relevant conditions. You don't need to meet the basic conditions again but you must meet the retirement exemption conditions. | Detailed Reasoning - Application to your circumstances: In this case, as discussed above, you satisfy the basic conditions for the small business CGT concessions. You are entitled to choose the small business rollover to defer all or part of the capital gain. | 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. | Detailed Reasoning - Application to your circumstances: As discussed above, if you fail to acquire a replacement asset by the end of the replacement asset period, CGT event J5 will happen. At this time, you will make a capital gain equal to the amount previously disregarded under the rollover concession. A capital gain from CGT event J5 may be eligible for the retirement exemption if you meet the relevant conditions. In your case, provided you keep a written record of the amount you chose to disregard, you are entitled to the small business retirement exemption to a capital gain made from CGT event J5. If you are over 55 years of age at the time of making the choice, you are not required to contribute any amount to a complying superannuation fund or RSA.