Private ruling: Capital gains tax small business relief
Date of advice: 10 February 2016
Published: April 2016
Ruling period: 1 July 2015 to 30 June 2016
Date scheme commenced: The scheme has commenced.

Ruling: Q1: Are the basic conditions in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) met so that you are eligible for the capital gains tax (CGT) concessions for small business? | A1: Yes. | Q2: If you retire can the 15 year exemption in terms of section 152-105 of the ITAA 1997 apply so that you can disregard any capital gain made on disposal of the property? | A2: Yes. | Q3: Can the small business retirement exemption concession in terms of section 152-305 of the ITAA 1997 apply if you do not retire? | A3: No. The small business retirement exemption concession cannot be applied as the 15 year exemption applies as determined in Question 2 to disregard any capital gain made on the disposal of the property.

Relevant facts and circumstances: The following information was provided with the application: You are a sole practitioner. The business has operated continuously for over 15 years. The property was purchased more than 15 years ago. The property was purchased exclusively to be used in the operation of the business. The business has operated from the property since it was acquired. The property has not been used for any other purpose or rented to any other person. You have worked continuously on a full-time basis in the business. It is stated that the aggregated turnover of the business is likely to be less than $2 million for the current income year. You are over 55 years of age and you are planning to retire in the near future. You intend to transfer the ownership of the property to the X Superannuation Fund, which is a complying superannuation fund. You are a member of the X Superannuation Fund. In response to a request for further information about meeting the aggregated turnover test for a small business entity you advised that you do not have any affiliates for purposes of section 328-130 of the ITAA 1997 or for the purposes of determining your aggregated turnover. For the purposes of calculating the aggregated turnover in section 328-115 of the ITAA 1997 there are no entities connected with the business carried on as a sole practitioner.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 103-25 | Subsections 103-25(1), (2) and (3) | Paragraph 103-25(3)(b) | Section 104-10 | Section 116-30 | Division 152 | Subdivision 152-A | Subdivision 152-B | Subdivision 152-D | Section 152-10 | Subsection 152-10(1) | Paragraphs 152-10(1)(a) and (b) | Subparagraph 152-10(1)(c)(i) | Paragraph 152-10(1)(d) | Section 152-35 | Section 152-40 | Section 152-105 | Subsections 152-105(a), (b), (c) and (d) | Section 152-300 | Section152-305 | Subsection152-305(1) | Paragraph 152-305(1)(a) | Section 152-315 | Subsections 152-315(1), (2), (3), (4) and (5) | Section 152-320 | Subsection 152-320(1) | Section 152-330 | Section 328-110 | Subsection 995-1(1)

Reasons for decision: Summary: The basic conditions for relief for a small business from the application of capital gains tax provisions are contained in section 152-10 of Subdivision 152-A . The relevant provisions are identified as paragraphs 152-10(1)(a) and (b), subparagraph 152-10(1)(c)(i) and paragraph 152-10(1)((d). Those provisions have been examined and it has been found that they are or will be met. Therefore the basic conditions for relief are or will be satisfied. | Detailed Reasoning - Detailed reasoning: Division 152 (section 152-1 to section 152-430) provides small business relief from capital gains tax (CGT) provisions subject to a number of conditions being met. In the present case section 104-10 applies. That section provides that when you dispose of a CGT asset, CGT event A1 occurs. The disposal occurs when the ownership of a CGT asset, for example land and buildings, changes. The disposal may result in the realisation of a capital gain and a consequent liability for capital gains tax. The basic conditions for relief under Division 152 are contained in section 152-10 of Subdivision 152-A. Subsection 152-10(1) reads as follows: A *capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain: (a) a *CGT event happens in relation to a *CGT asset of yours in an income year; Note: This condition does not apply in the case of CGT event D1: see section 152-12 (b) the event would (apart from this Division) 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 (see section 152-15) (iii) 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; (iv) the conditions mention in subsections (1A) or (1B) are satisfied in relation to the CGT asset is an interest in an asset of the partnership (d) the CGT asset satisfies the active asset test (see section 152-35) Note: This condition does not apply in the case of CGT event D1: see section 152-12 Subsection 152-10(1A) relates to passively held assets where the assets are held respectively by your affiliates or entities connected with you, while subsection 152-10(1B) relates to assets held by a partnership in which you are a partner. In view of the facts of your case and the statement provided by you neither provision applies to you. Subsection 152-10(2) specifies some additional basic conditions for shares in a company or interests in a trust but that provision does not apply to this case. Subsection 152-10(3) notes that there are extra conditions for some concessions and that these are set out in the relevant Subdivisions. Those extra conditions do not need to be considered here because this question is limited to the basic conditions. Finally, subsection 152-10(4) deals with special rules for certain CGT events. Those events are CGT events J2, J5 and J6. Those events involve respectively a change to a replacement asset after roll-over; the failure to acquire a replacement asset after roll-over; and the cost of acquisition of a replacement asset after roll-over; however none of those events occurs in this case. Consequently in this discussion the examination of the basic conditions is confined to subsection 152-10(1). In the present case paragraphs 152-10(1)(a) and (b), subparagraph 152-10(1)(c)(i) and paragraph 152-10(1)((d) are relevant and must be considered. The facts as stated above show that the basic conditions in paragraphs 152-10(1)(a) and (b) are satisfied. However, the conditions in subparagraph 152-10(1)(c)(i) and paragraph 152-10(1)(d) need further consideration because the interpretation of each of those provisions turns on the terms of another provision. Subparagraph 152-10(1)(c)(i) requires that the entity is a "small business entity" and that term is defined in subsection 995-1(1) to have the meaning given by section 328-110. Section 328-110 relevantly reads: You are a small business entity for an income year (the current year ) if: (a) you carry on business in the current year; and (b) one or both of the following applies: (i) you carried on a business in the income year (the previous year ) before the current income year and your *aggregated turnover for the previous year was less than $2 million; (ii) your aggregated turnover for the current year is likely to be less than $2 million. Broadly, a taxpayer's aggregated turnover is the sum of their annual turnover together with the annual turnover of any entity that is an affiliate or is connected to the taxpayer - see sections 328-115, 328-130 and 328-125 of the ITAA 1997. You state that you carry on business and that the turnover is less than $2 million. Further, you state that you have no affiliates nor are there any entities connected with you for the purposes of these provisions. You state that you carry on business and that the turnover is less than $2 million. Thus you are a small business entity and therefore you satisfy the condition in subparagraph 152-10(1)(c)(i). Paragraph 152-10(1)((d) requires that the active asset test in section 152-35 is met. The term "active asset" is defined in subsection 995-1(1) to have the meaning given by section 152-40. Section 152-40 relevantly reads: 152-40(1) A *CGT asset is an active asset at a time if, at that time: (a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a *business that is carried on (whether alone or in partnership) by: (i) you; or (ii) …. In the present case the CGT asset, being the real property that was acquired by you, has been the location from which the business has operated since acquisition of the property. Therefore the property is an active asset. Section 152-35 regarding the active asset test relevantly reads: 152-35(1) A *CGT asset satisfies the active asset test if: (a) … (b) 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 7½ years during the period specified in subsection (2). 152-35(2) The period (a) begins when you *acquired the asset; and (b) ends at the earlier of: (i) the *CGT event; and (ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business. The property has been owned for over 15 years and has been an active asset all that time. Therefore the active asset test in section 152-35 will be met and in turn the condition in paragraph 152-10(1)(d) will be met. Accordingly, all the relevant basic conditions in subsection 152-10(1) of Subdivision 152-A, as identified above, are or will be satisfied. | Summary: Section 152-105 in Subdivision 152-B provides that a small business entity may disregard a capital gain arising from the disposal of a CGT asset that it has owned for at least 15 years if certain conditions are met. The qualifying conditions are examined with respect to your business. It has been determined that as all of the conditions in section 152-105 are currently met or will be met you can disregard any capital gain arising from the CGT event (CGT event A1) upon disposal of the property. | Detailed Reasoning - Detailed reasoning: Section 152-105 in Subdivision 152-B provides that a small business entity may disregard a capital gain arising from the disposal of a CGT asset that it has owned for at least 15 years if certain conditions are met. It was found in answer to Question 1 above regarding the basic conditions in section 152-10 of Subdivision 152-A that the business you carry on is a small business entity in terms of section 328-110. Therefore the application of section 152-105 is considered with respect to your business. Section 152-105 reads: 152-105 If you are an individual, you can disregard any *capital gain arising from a *CGT event if all of the following conditions are satisfied: (a) the basic conditions in Subdivision 152-A are satisfied for the gain; (b) you continuously owned the *CGT asset for the 15 year period ending just before the CGT event. Note: Section 152-115 allows for continuation of the period if there is an involuntary disposal of the asset. (c) if the CGT asset is a *share in a company or an interest in a trust - the company or trust had a *significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset; (d) either: (i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or (ii) you are permanently incapacitated at the time of the CGT event. It is necessary to determine whether the terms of section 152-105 are met. Subsection 152-105(a) is met because it has been found in answer to Question 1 above that the basic conditions in section 152-10 are currently satisfied for the gain or will be satisfied in the near future when the disposal of the CGT asset takes place. Subsection 152-105(b) is met as you have owned the property continuously for a period of more than 15 years. Subsection 152-105(c) does not apply because the CGT asset is not a share or an interest in a trust. The CGT asset is real estate. Subsection 152-105(d) will be met as you are currently over 55 years and the CGT event which is yet to occur will happen in connection with your retirement. Therefore as all of the conditions in section 152-105 are currently met or will be met you can disregard any capital gain arising from the CGT event (CGT event A1) upon disposal of the property. | Summary: The small business retirement exemption is contained in Subdivision 152-D. Section 152-305 provides that as an individual you may choose to disregard a capital gain from a CGT event happening to a CGT asset of your small business. Amongst other conditions, which are discussed in detail below, this exemption is first subject to the conditions set out in subsection 152-305(1) being met. As you are over 55 years of age only the conditions in paragraph 152-305(1)(a) apply. Paragraph 152-305(1)(a) in turn requires that the basic conditions in Subdivision 152-A are met and it has been found in answer to Question 1 above that they are met. Further, it was found that you are eligible to make a choice under subsection 152-305 to disregard all or part of the gain up to the lifetime limit of $500,000. However, as the 15-year exemption applies to disregard the capital gain on the disposal of your property as discussed in Question 2, the small business retirement exemption concession cannot apply - see section 152-330 | Detailed Reasoning - Detailed reasoning: The small business retirement exemption is contained in Subdivision 152-D (sections 152-300 to section 152-330). Section 152-300 describes what Subdivision 152-D is about and it states: You can choose to disregard a capital gain from a CGT event happening to a CGT asset of your small business if the capital proceeds from the event are used in connection with your retirement. There is a lifetime limit of $500,000 for all choices that can be made in respect of an individual under this Subdivision. You may choose to apply the concession in section 152-205 (small business 50% reduction) before this one. For an additional concession, see also Subdivision 152-E (small business roll-over). You do not need to satisfy the basic conditions for this exemption in relation to CGT events J5 and J6. Section 152-305 provides that subject to a number of conditions being met, a small business may choose to disregard all or part of a capital gain from a CGT event happening to a CGT asset of the small business. Subsection 152-305(1), which applies to an individual, reads: If you are an individual, you can choose to disregard all or part of a *capital gain if: (a) the basic conditions in Subdivision 152-A are satisfied for the gain; and (b) if you are under 55 just before you make the choice - you contribute an amount equal to the asset's *CGT exempt amount to a *complying superannuation fund or an *RSA; and Note: For the non-deductibility of the contribution, see subsection 290-150(4) (c) the contribution is made: (i) If the relevant CGT event is CGT event J2, J5 or J6 - when you made the choice; or (ii) Otherwise - at the later of when you made the choice and when you received the proceeds. Note: Section 103-25 tells you when the choice must be made. It has been determined in answer to Question 1 above that the basic conditions in section 152-10 of Subdivision 152-A will be satisfied and therefore the requirement in paragraph 152-305(1)(a) is met. Given that you are over 55 years of age paragraphs 152-305(1)(b) and (c) do not apply to you. Accordingly, there is no requirement for you to make a contribution to a complying superannuation fund or an RSA. Accordingly, you are eligible to make a choice under subsection 152-305 to disregard all or part of the gain up to the lifetime limit of $500,000. | Detailed Reasoning - Exclusion: However, section 152-330 provides that the disregarding of a capital gain where it is owned for 15 years in Subdivision 152-B has priority over Subdivision 152-D i.e. small business retirement exemption. The 15 year rule is discussed above in answer to Question 2. That question is about the application of section 152-105 in Subdivision 152-B which provides that a small business entity may disregard a capital gain arising from the disposal of a CGT asset that it has owned for at least 15 years, where certain conditions are met. Section 152-330 in Subdivision 152-D reads This Subdivision does not apply to a *capital gain to which Subdivision 152-B (15 year exemption) applies. Note: Under this Subdivision, such a gain is entirely disregarded, so there is no need for any further concession to apply. As it was found in Question 2 that Subdivision 152-B i.e. 15-year exemption applies to disregard the capital gain upon disposal of your property, the small business retirement exemption in Subdivision 152-D cannot apply.