Private ruling: Small business retirement exemption
Date of advice: 5 March 2018
Published: June 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is your 50% ownership interest in the property an active asset for the purposes of the small business capital gains tax concessions of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Are you eligible for the small business retirement exemption from the sale of your 50% ownership interest in the property? | A2: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You, being L and M purchased a 50% ownership interest in a property (the property) approximately XX years ago. A third party owns the remaining 50% ownership interest in the property. The property is used as a place of business operated by N (the business). You state that the business is a small business entity with a turnover of less than $2,000,000. L and M are shareholders and directors of N, and each hold 50% shares in N. The business occupies around XX% of the floor area of the building situated on the property. The remaining floor area of the building is owned by a third party who leases it to a business. You have sold your 50% ownership interest in the property. You are under 55 years of age. You intend to make the choice to contribute the CGT exempt amount received through the sale of your property into a complying superannuation fund. The exempt amount will not exceed your remaining CGT retirement exemption limit.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-300 | Income Tax Assessment Act 1997 Section 152-305 | Income Tax Assessment Act 1997 Section 152-310 | Income Tax Assessment Act 1997 Section 152-315 | Income Tax Assessment Act 1997 Section 152-320 | Income Tax Assessment Act 1997 Section 328-125

Reasons for decision: Summary: Your 50% ownership interest in the property is an active asset for the purposes of the small business capital gains tax concessions as it falls within the definition of active asset in section 152-40 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The meaning of “active asset” is explained in section 152-40 of the ITAA 1997. The relevant provision here is paragraph 152-40(1)(a) which states: (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. your affiliate; or iii. another entity that is connected with you; or b) if the asset is an intangible asset … Under section 328-125of the ITAA 1997, an entity is connected with another entity if: (a) Either entity controls the other entity in a way described in this section; or (b) (b) both entities are controlled in a way described in this section by the same third entity. Subsection 328-125(2) of the ITAA 1997 provides: An entity (the first entity) controls another entity if the first entity, its *affiliates, or the first entity together with its affiliates: (a) except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of: i. any distribution of income by the other entity; or ii. if the other entity is a partnership - the net income of the partnership; or iii. any distribution of capital by the other entity; or (b) if the other entity is a company – own, or have the right to acquire the ownership of, *equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company. Subsection 152-40(4) of the ITAA 1997 states CGT assets which are not active assets included: ● interests in an entity connected with the taxpayer; ● shares in companies and interests in trusts; ● financial instruments, such as loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, or rights or options in respect of a share, security, loan or contract; or ● assets whose main use was to derive interest, annuities, rent, royalties or foreign exchange gains. This particular exclusion as an active asset did not apply if the asset was an intangible asset which had been substantially developed, altered or improved by the taxpayer so that its market value had been substantially enhanced, or an asset whose main use for deriving rent was only temporary. | Detailed Reasoning - Application to your circumstances: Your 50% interest in the property does not fall into the definition of assets that are not active assets. The definition of active assets does not require exclusive use of the asset for business purposes. The business carried on by N has occupied approximately half the floor area of the total building area of the property since relocating ten years ago. N operates the business and is a connected with you as you both own equal shares in N. Therefore, the property is an active asset. | Summary: You qualify for the small business retirement exemption as you a small business entity, you meet the active asset test and are under 55 years of age and intend to make a choice to pay an exempt amount into a complying superannuation fund or RSA. | Detailed Reasoning - Detailed reasoning: The basic conditions for the small business capital gains tax concessions in Subdivision 152-A of the ITAA 1997 are: ● A CGT event happens in relation to a CGT asset of yours in an income year; and ● The event will result in a capital gain; and ● You are either a small business entity for the income year or satisfy the maximum net asset value test; and ● The CGT asset satisfies 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. | 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. | Detailed Reasoning - Retirement exemption: If you satisfy the conditions within Subdivision 152-A and are under 55 years of age, you can make the choice to access the retirement exemption. You must pay an exempt amount into a complying superannuation fund or 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: You have advised that you and the entity connected with you that operates the business have an aggregate turnover of less than $2,000,000. You have owned the property for around XX years and have leased it N. N have carried on a business. N have occupied approximately 50% of the floor area of the entire building on the property. You have advised that when you sell your 50% ownership interest in the property, the CGT exempt amount will be contributed to a complying superannuation fund. You have also advised that the amount that will be contributed to a superannuation fund will not exceed the CGT retirement exemption limit. You therefore meet the small business entity and active asset test to access the small business retirement exemption.