Private ruling: Small business 15-year exemption concession
Published: June 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to disregard any capital gain made on the transfer of your interest in the ownership of 50% of one of the properties by applying the small business 15 year exemption concession? | A1: Yes

Relevant facts and circumstances: You, your spouse and your child jointly purchased two properties as tenants in common in the 1986-87 financial year. The ownership in each of the two properties was as follows: · your spouse, 25% ownership interest; · your child, 50% ownership interest; and · you 25% ownership interest. The two properties have been continuously rented out since it was purchased until the 2005-06 financial year by a company. You state that the company used the properties for business purposes. You spouse, your child and yourself each own 1 share in the company. You were a director of the company. You state that the company was run by the family and that you and your spouse worked the company together for many years along with your child. You state that the company is a connected entity and that you and your spouse would be affiliates. The properties were never the main residence of you, your spouse or your child. Your spouse passed away in the financial year, aged over 55, and the estate was fully administered, with you the only beneficiary of your spouse's estate. You and your child will transfer your respective ownership interests in one dwelling to each other, resulting in you each owning 100% of one property. Both properties are valued approximately equally. You were over 55 at the time of the transfer of the property. You stated that the transfer happened in connection with your retirement as you no longer work in the business. You state you satisfy the maximum net asset value test.

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 Subsection 152-10(1A) | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 328-130 | Income Tax Assessment Act 1997 Section 152-47 | Income Tax Assessment Act 1997 Section 152-105

Reasons for decision: Summary: You have disposed of your interest in a property, therefore capital gains tax (CGT) event A1 has occurred and any capital gain made on the disposal of the asset will be assessed under the capital gains tax provisions. However, as you satisfy the basic conditions to be eligible for the small business concessions, and, you also satisfy the extra specific conditions applicable to the small business 15 year exemption concession, you may fully disregard any capital gain made on the disposal of your interest in the property. | Detailed Reasoning - Change in ownership of a CGT asset: Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when your ownership in a CGT asset (eg. property) is transferred to another entity. The time of the event is when you enter into a contract for the disposal, or, if there is no contract, the time of disposal is taken to be the time when the change in ownership occurs. In your case, you jointly purchased two properties with your spouse and your child. Your spouse passed away in 2010 and you and your child are the surviving tenants in common of the two properties. If one of the tenants in common passes away, their interest in the property is an asset of their deceased estate. This means that it can be transferred only to a beneficiary of the estate, or be sold by the legal personal representative of the estate. Therefore, as the sole beneficiary of your spouse's estate, their 25% ownership interest in the properties passed to you. You and your child intend transferring your respective interests in one property to each other. When you transfer your interests in one property to your child, you will exchange them for their interests in the other property, giving each of you 100% ownership of an individual property. The transfer of your interests to your child will result in a CGT event A1 occurring as you will have disposed of your ownership in your interests in the property. You are viewed as having two separate CGT assets in each property. The 25% ownership interest you acquired when the properties were purchased in 1986-87, and the 25% ownership interest in each property you acquired when your spouse passed away. When calculating the capital gain made on the disposal of your interests in the properties, you will need to ascertain two amounts, the capital proceeds and the cost base of each of your interests in the property. You will make a capital gain if the capital proceeds from the disposal are more than your interest's cost base. Your capital proceeds for the disposal of your interests in one property will be the market value of the interests in the other property that your child transfers into your name, at the date of transfer. That is, the market value of their 50% interest in the property they originally acquired on the date the interests are transferred into your name. The acquisition date and cost base of your original 25% interest in the property remains unchanged and will be used to calculate the capital gain made on the disposal of this interest. The cost base of the 25% interest that passed to you from your spouse will be the cost base of that interest on the date of your spouse's death in 2010 as the interest is not a main residence or a pre-CGT asset. | Detailed Reasoning - Small business CGT concession eligibility and the active asset test: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are: · a CGT event happens in relation to a CGT asset in an income year. · the event would have resulted in the gain · at least one of the following applies: · you are a small business entity for the income year · you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 · 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 · 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. · the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. 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. Section 152-35 of the ITAA 1997 explains that an asset will be an active asset if you have owned the asset for more than 15 years and it was an active asset for a total of at least 7 ½ years from the time when you acquired the asset until the CGT event. Or, 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 time from when you acquired the asset until the CGT event. Section 328-125 of the ITAA 1997 provides the meaning of 'connected with' an entity. Under this provision, an entity will be connected with you if either entity controls the other entity or, both entities are controlled by the same third entity. In the case of a company, an entity controls another entity if it (or its affiliates, or it together with its affiliates) beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power. Section 328-130 of the ITAA 1997 provides that an individual or a company is an affiliate of yours if the individual or company 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. For small business relief purposes, section 152-47 of the ITAA 1997 provides that a spouse is taken to be an affiliate where an asset is owned by you and that asset is used in a business carried on by an entity. This includes situations where the asset is used in a business carried on by an entity your spouse owns or has an interest in. In your case, CGT event A1 relating to the disposal of an asset (your interest in one of the properties), has occurred. The event has resulted in a capital gain and, you state that you satisfy the maximum net asset value test. Your spouse is considered to be an affiliate of yours for small business relief purposes as an asset you own is used in a business your spouse has an interest in. The company is considered an entity 'connected with' you, as you, and your affiliate (your spouse), beneficially own 66% of the voting power in the company. You have owned an interest in the properties for over 15 years and the properties have been used for business purposes by the company. Therefore, the properties are considered to be active assets. Accordingly, based on the information provided, you have satisfied the basic conditions required to be eligible for the small business CGT concessions. | Detailed Reasoning - Small business 15-year exemption: Subsection 152-105 of the ITAA 1997 provides that an individual can disregard any capital gain if all of the following conditions are satisfied: · you satisfy the basic conditions · you continuously owned the CGT asset for the 15-year period ending just before the CGT event · you are either: · 55 or over at the time of the CGT event and the event happens in connection with your retirement; or · you are permanently incapacitated at the time of the CGT event. In your case, you satisfy the basic conditions, you have continuously held an interest in the ownership of the asset for over 15 years, you were over 55 at the time of the transfer of ownership of the property and the event has happened in connection with your retirement as you no longer work in the business. Accordingly, as you satisfy all the conditions necessary to access the small business 15 year exemption concession, you may disregard any capital gain made on disposal of your interest in the property. Death and the small business 15-year exemption You may be eligible for the concessions if you make a capital gain on an asset within two years of a person's death, if that asset is or was part of that individuals estate, and you are a: · beneficiary of the deceased estate · legal personal representatives (executor), or · trustee or beneficiary of the testamentary trust (trusts created by a will). You may also be eligible if you, together with the deceased, owned the asset as joint tenants. You will be eligible for the 15-year exemption to the same extent that the deceased would have been just prior to their death, except that: · the CGT event does not need to be in connection with the retirement of the deceased · the deceased needs to have been 55 or older immediately before their death, rather than at the time of the CGT event. Based on the information provided, your spouse would have been eligible for the 15-year exemption. Accordingly, the small business 15-year exemption concession may also be utilised to disregard any capital gain made on disposal of the interest in the property that passed to you on the death of your spouse.

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