Private ruling: Capital gains tax
Date of advice: 1 October 2015
Published: October 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to apply the small business capital gains tax (CGT) 15 year exemption under subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • the application for private ruling, and • the further information provided. You and your spouse carry on a business on multiple properties in partnership. You and your spouse are both over 55 years of age. A contract of sale has been signed for the sale of the main property containing the residence. No business is conducted by the partners individually on the land. The assets owned by you and your spouse (other than superannuation and personal use assets) have a net value in excess of $6 million. The partnership has a turnover of less than $2 million. As a result of the property sale, the total hours worked per week will reduce considerably in line with the reduction in area, stock numbers and property maintenance requirements. Previously you and your spouse combined worked over 100 hours per week, this has reduced to X hours per week following the sale. You and your spouse have recently acquired a residence in a nearby town to which they will relocate and reside in. You and your spouse intend to contribute as much of the sale proceeds as the relevant caps allow to a superannuation fund and supporting themselves financially from the fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | 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 152-105 | Income Tax Assessment Act 1997 section 152-320 | Income Tax Assessment Act 1997 section 328-125

Reasons for decision: Summary: Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business 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. (a) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when your ownership in a CGT asset (eg. land or buildings) is transferred to another entity. Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. However, subsection 152-40(4) explains that an asset whose main use is to derive rent cannot be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use. Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership, 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 and a half years. Connected with test Subsection 328-125(1) of the ITAA 1997 explains that 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. An entity controls a partnership if it or its affiliates (or all of them together) owns or has the right to acquire ownership of, interests in the partnership that give the right to receive at least 40% of the net income of the partnership. You and your spouse each have a 50% interest in the partnership. Therefore each partner controls the partnership. The assets were used in the course of carrying on a business by the partnership, a small business entity, for the entire ownership period. Therefore, we accept that the property satisfies the active asset test. 15 year exemption You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you: • satisfy the basic conditions for the small business CGT concessions and • continuously owned the CGT asset for the 15-year period ending just before the CGT event happened. If you are an individual: • when the CGT event happened • you were permanently incapacitated, or • you were 55 years old or older, and the event happened in connection with your retirement. Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. In this case, you and your spouse satisfy the basic conditions. Further, the property has been owned for more than 15 years and you and your spouse are both over 55 years of age. We accept that given the change in activities and the significant reduction in hours the CGT event happened in connection with your retirement. Therefore, you and your spouse are entitled to apply the 15 year exemption in relation to any capital gain made on the property.