Private ruling: Eligibility for small business capital gains tax concessions
Date of advice: 27 January 2016
Published: March 2016
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the anticipated gain from the sale of the Property be considered capital gain event A1? | A1: Yes. | Q2: Did the capital gain event happen in the financial year ended 30 June 20XX? | A2: Yes. | Q3: Are the Taxpayers able to discount the capital gain in accordance with Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes. | Q4: Are the Taxpayers eligible to apply the small business capital gains tax (CGT) 15 year exemption concession in calculating their assessable capital gain? | A4: No. | Q5: Are the Taxpayers eligible to apply the small business CGT 50% active asset reduction concession in calculating their assessable capital gain? | A5: Yes. | Q6: Are the Taxpayers eligible to apply the small business CGT retirement exemption concession in calculating his assessable capital gain? | A6: Yes. | Q7: Are the Taxpayers eligible to apply the small business CGT rollover concession in calculating their assessable capital gain? | A7: Yes.

Relevant facts and circumstances: Taxpayer X and Taxpayer Y ('the Taxpayers') purchased the Property in the 19XX financial year. They used the property in a primary production business operated as a partnership. In 20XX they built a house on the property. The house occupied a small percentage of the land. Initially the house was used by the Taxpayers for short-term accommodation when the farming work was extensive and to store farm equipment. The residence was rented in 20XX. The Taxpayers continued to farm the remaining land on the property after the residence was rented. In the 20XX-XX financial year the Taxpayers entered into an offer deed ('the Deed') to sell the Property to the purchaser provided that the purchaser accepted the offer within the offer period. In the 20XX-XX financial year the purchaser exercised their right under the offer deed and entered into a contract for sale of the Property with the Taxpayers. The settlement for the sale of the Property occurred in. The Taxpayers continued farming the land until the contract was settled. The primary production business is a small business entity. The Taxpayers anticipate making a capital gain from the sale of the Property. When the contract was signed, Taxpayer A was over the age of 55 years while Taxpayer B was under the age of 55 years. Taxpayer B was aged 55 years or older when the ruling was requested. The Taxpayers entered into a contract to purchase another property in the 20XX-XX financial year and will use it for a primary production enterprise. The Taxpayers will maintain a written record of any capital gain they wish to disregard under the small business CGT retirement exemption. The Taxpayers have not lodged their tax returns for the financial year ended 30 June 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 100-25 | Income Tax Assessment Act 1997 Section 103-25 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-40 | Income Tax Assessment Act 1997 Section 115-5 | Income Tax Assessment Act 1997 Section 115-10 | Income Tax Assessment Act 1997 Section 115-15 | Income Tax Assessment Act 1997 Section 115-20 | Income Tax Assessment Act 1997 Section 115-25 | Income Tax Assessment Act 1997 Section 116-65 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 Section 152-205 | Income Tax Assessment Act 1997 Section 152-305 | Income Tax Assessment Act 1997 Section 152-410

Reasons for decision: Summary: The Property is a CGT asset and its' disposal triggered CGT event A1 in the 20XX-XX financial year. The anticipated capital gain is considered to be assessable income relating to the financial year ended 30 June 20XX. The Taxpayers are entitled to apply the CGT discount to the capital gain resulting from the disposal of the property. They are also entitled to apply the small business 50% active asset, retirement exemption and rollover concessions in calculating the assessable capital gain, if any, to be included in their tax returns for the financial year ended 30 June 20XX. They are not entitled to apply the small business 15 year exemption. | Detailed Reasoning - Detailed reasoning: Section 106-5 of the ITAA 1997 states any capital gain from a CGT event happening in relation to a partnership or one of its assets is made by the partners individually. Therefore, whilst the Property was owned by the partners and used in their partnership business activities, the individual partners are assessable on any capital gain resulting from the sale of the Property. | Detailed Reasoning - Sale of the Property as a CGT event and timing of the CGT event.: You make a capital gain or capital loss when certain events or transactions (called CGT events) happen. The disposal of a CGT asset is a CGT event. Land and buildings are CGT assets as are options. The Property is a CGT asset. Entering into the Deed giving the purchaser an option to acquire the property triggered CGT event D2 Granting an option. Subsection 104-40(2) of the ITAA 1997 states a capital gain made from the grant of the option is disregarded if the option is exercised. Thus, when the purchaser exercised the option and entered into a sale contract with the Taxpayers CGT event A1 Disposal of a CGT asset occurred. Therefore, a CGT event occurred in the 20XX-XX financial year when the Taxpayers entered into the sale contract with the purchaser. The anticipated capital gain is considered to be assessable income for the year ended 30 June 20XX. | Detailed Reasoning - Entitlement to apply CGT discount: Under section 115-5 of the ITAA 1997 you make a discount capital gain if the following requirements are satisfied: • you are an individual, a trust or a complying superannuation entity • a CGT event happens to an asset you own • the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999 • you acquired the asset at least 12 months before the CGT event, and • you did not choose to use the indexation method. Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years. The discount capital gain is included in your assessable income and taxed at the marginal rate applicable to that income for that year. In this case, the Taxpayers disposed of the Property which they owned for more than 12 months. As the CGT event occurred after 21 September 1999 they are each able to discount their individual share of the capital gain made by 50%. | Detailed Reasoning - Small business CGT concessions - basic conditions: To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. The basic conditions for the small business CGT concessions in subdivision 152-A of the ITAA 1997 (as relevant to this case) are: • the small business entity test and • the active asset test. Small business entity You will be a small business entity if you are an individual, partnership, company of trust that is carrying on a business and had an aggregated turnover of less than $2 million. In this case, from the information provided it is accepted that the partnership operated a primary production business with a turnover of less than $2 million. The Property was used in this business activity. The small business entity test has been met. 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 have 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 the acquisition until the business ceases. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, you spouse or child, or an entity connected with you. Paragraph 150-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. Taxation Determination TD 2006/78 discusses the circumstances in which premises used in the business of providing accommodation for reward can be active assets notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997. It also provides guidance on the treatment of assets which are used partly for business and partly to derive rent at any given time. TD 2006/78 states: 26. If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one single factor will necessarily be determinative, and resolving the matter is likely to involve a consideration of factors such as: • the comparative areas of the use of the premises (between deriving rent and other uses); and • the comparative levels of income derived from the different uses of the asset. In this case, the Taxpayers derived rent from a residence on the Property from 20XX. The residence occupied a small percentage of the Property. The remaining percentage of the Property continued to be used in the Taxpayers primary production business activities. It is accepted that the Properties main use was for the primary production business carried on by the Taxpayers. Accordingly, the Property is an active asset during the time it was owned by the Taxpayers - a period of over 15 years. | Detailed Reasoning - Small business 15 year exemption concession: An individual can disregard a capital gain from a CGT event happening to a CGT asset they have owned for at least 15 years if they: • satisfy the basic conditions for the small business CGT concessions • continuously owned the CGT asset for the 15 year period ending before the CGT event happened, and • when the CGT event happened: • they were permanently incapacitated, or • they were 55 years or older and the event happened in connection with their 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. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce. As Taxpayer A was over 55 years of age at the time of the CGT event and Taxpayer B was under 55 years of age at that time, their eligibility to this concession will be examined separately. In Taxpayer A's case, the basic conditions have been met and the Property was owned for more than 15 years. However, the CGT event cannot be said to have happened in connection with their retirement. After selling the Property, Taxpayer A and Taxpayer B entered into a contract to purchase a new property to operate a primary production business. As the new property is larger than the original Property, it cannot be said there would be a significant reduction in the number of hours spent in the primary production business activities by Taxpayer A. In Taxpayer B's case, the basic conditions have been met and the Property was owned for more than 15 years. However, there is no information to indicate that Taxpayer B was permanently incapacitated at the time of the CGT event. Neither Taxpayer entitled to apply the small business 15 year exemption concession, as they do not satisfy the criteria. | Detailed Reasoning - Small business 50% active asset reduction concession: If you do not qualify for the small business 15 year exemption, the small business 50% active asset reduction may apply to reduce the capital gain (Subdivision 152-C of the ITAA 1997)/ The small business 50% active asset reduction applies automatically if the basic conditions are satisfied, unless you choose for it not to apply. As discussed above, the Property meets the basic conditions for the small business CGT concessions. The Taxpayers are entitled to apply the small business 50% active asset reduction to a capital gain relating from the sale of the Property. | Detailed Reasoning - Small business retirement exemption: Subdivision 152-D of the ITAA 1997 allows an individual to choose to disregard all or part of a capital gain if: • you satisfy the basic conditions • you keep a written record of the amount you choose to disregard (the CGT exempt amount), and • if you are under 55 years just before you make the choice, you make a personal contribution equal to the CGT exempt amount to a complying superannuation fund or retirement savings account (RSA). The CGT exempt amount must not exceed $500,000 reduced by any previous CGT exempt amounts you have disregarded under the retirement exemption. Section 103-25 of the ITAA 1997 states you must make your choice by the day you lodge your income tax return for the income year in which the relevant CGT event happened. If you are 55 years old or older, when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA, even though you may have been under 55 years old when you received the capital proceeds. As of the date of this ruling, both Taxpayers are aged 55 years or older and have not lodged their tax returns for the financial year ended 30 June 20XX. Therefore they are both eligible to claim the small business retirement exemption provided they keep a written record of the CGT exempt amount. The CGT exempt amount must not exceed $500,000 reduced by any previous CGT exempt amounts you have disregarded under the retirement exemption. | Detailed Reasoning - Small business rollover concession: The conditions surrounding the small business rollover concession are contained in subdivision 152-E of the ITAA 1997. The small business rollover allows you to defer all or part of a capital gain made from a CGT event happening to an active asset. To qualify for the small business rollover, you need to satisfy the basic conditions that apply to all the CGT small business concessions. A condition of choosing the rollover is that you must replace the active asset or incurred expenditure on a capital improvement to an existing asset by the end of the replacement asset period. This period starts one year before and ends two years after the relevant CGT event. In this case, the basic conditions have been met and the Taxpayers have entered into a contract to purchase a replacement asset within two years of the CGT event. The contract will settle within the two year period. Therefore, the Taxpayers are entitled to apply the small business rollover concession.