Private ruling: Capital Gains Tax (CGT) - Small Business Concessions - Retirement Exemption
Date of advice: 16 March 2017
Published: August 2017

Ruling: Q1: If the Property was a post-CGT asset, does a person (the Client) satisfy the conditions of the small business 15-year exemption under Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)? Advice Yes

Relevant facts and circumstances: Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice. The Client and their spouse owned a number of farming properties on which a primary production business has been carried on by a family trust (the Trust) The Client sold one of the farming properties (the Property) in the income year ended 30 June 2016. The Property has been used in primary production by the Trust for over 25 years. The Property was acquired before 20 September 1985. For the 2016 income year, the Trust's income was less than $2 Million and it qualifies as a small business entity. As a result of the sale of the Property, primary production has decreased. As a result of the primary production reduction, the total number of hours worked by the Client has reduced. The Client was over the age of 55 at the time of the sale of the Property. The Client and their spouse are affiliates of each other and are connected with the Trust. The Client intends to contribute part of the proceeds from the sale of the Property to a complying superannuation fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-10(5) | Income Tax Assessment Act 1997 Section 149-10 | Income Tax Assessment Act 1997 Subdivision 152-B | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-110 | Income Tax Assessment Act 1997 Section 152-305 | Income Tax Assessment Act 1997 Section 292-90 | Income Tax Assessment Act 1997 Section 292-100

Reasons for decision: Summary: In order to be eligible for the small business CGT concessions, a number of basic conditions must be satisfied. In accordance with subsection 152-10(1) of the ITAA 1997, a capital gain a person makes may be reduced or disregarded if: (a) a CGT event happens in relation to an asset that they own; (b) the event would have resulted in a gain; (c) the CGT asset satisfies the active asset test; (d) at least one of the following applies: (i) they are a small business entity for the income year (ii) they satisfy the maximum net asset value test (iii) they 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 business, or (iv) they do not carry on a business but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected to you. | Detailed Reasoning - Active asset test: The active asset test is contained in section 152-35 of the ITAA 1997. It is satisfied if: ● a person has owned the asset for 15 years or less and the asset was an active asset of theirs for a total of at least half of the test period detailed below, or ● they have owned the asset for more than 15 years and the asset was an active asset of theirs 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. A CGT asset is an active asset if it is owned by a person and is used or held ready for use in a business carried on (whether alone or in partnership) by them, their affiliate, their spouse or child, or an entity connected with them. A person can disregard a capital gain from a CGT event happening to a CGT asset they have owned for at least 15 years if: (a) they satisfy the basic conditions for the small business CGT concessions (b) they continuously owned the CGT asset for the 15-year period ending before the CGT event happened, and (c) when the CGT event happened: (i) they were 55 years or older and the event happened in connection with their retirement, or (ii) they were permanently incapacitated. A CGT event may be 'in connection with your retirement' even if it occurs at some time before retirement. In this case, the Client continuously owned the Property for 15 years prior to the sale of the Property and was aged over 55 at that time. It is considered that the selling of the Property and the reduction in working hours related to the connected entity's business are events which have occurred in connection with their retirement. However, in accordance with subsection 104-25(5) of the ITAA 1997, a capital gain (or loss) a person makes on disposal of an asset is disregarded if the person acquired the asset before 20 September 1985. Therefore, as the Property was acquired before 20 September 1985 (and is a pre-CGT asset under section 149-10 of the ITAA 1997), no capital gain arises when the Property is sold that may be disregarded under the small business 15-year exemption. If the Property had been a post-CGT asset (an asset that is not a pre-CGT asset under section 149-10 of the ITAA 1997), the Client would be able to disregard any capital gain resulting from the sale of the Property because the conditions for the small business 15 year exemption contained within Division 152 of the ITAA 1997 would have been met. | Detailed Reasoning - Other relevant comments: It should be noted that, for the purposes of section 292-90 of the ITAA 1997 ( Non-concessional contributions for a financial year ), in determining whether the conditions in subsections 292-100(2) and (4) of the ITAA 1997 ( Contributions relating to some CGT small business concessions ) are satisfied in relation to a pre-CGT asset, the asset is treated as a post-CGT asset.