Private ruling: CGT - small business concessions - retirement exemption - main use to derive rent
Date of advice: 26 August 2025
Published: 27 October 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will Person A and Person B be able to choose to apply the small business retirement exemption under section 152-305 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard all or part of the capital gain they will make when they transfer or dispose of their respective interests the Property to their self-managed superannuation fund (SMSF)? | A1: No.

Relevant facts and circumstances: Person A and Person B are spouses. In XX 20XX, Person A and Person B acquired the Property. Person A has a XX% ownership interest in the Property. Person B has a XX% ownership interest in the Property. From acquisition until XX 20XX the Property was leased to X. Person A and Person B received fixed rental income every month from this arrangement. From the XX 20XX until present the Property is being used under a joint venture arrangement. Under the joint venture the Property is managed by an entity who carries on an accommodation business. The business and affairs of the joint venture business are under the control and direction of the business. The business decided on all matters in relation to the business and affairs of the business. Person A and Person B have under the joint venture have an obligation to maintain their Property in the condition as required for the business to carry on the accommodation business. Person A and Person B do not have any involvement with the business outside the joint venture. The net profit received by the business is distributed under the joint venture to each apartment owner.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | 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

Reasons for decision: Summary: Retirement exemption Under section 152-305 of the ITAA 1997, you may choose to disregard a capital gain from a CGT event involving a CGT asset if you meet the basic conditions outlined in Subdivision 152-A of the ITAA 1997. Basic conditions To meet the basic conditions for relief the following must be satisfied: • A CGT event happens in relation to a CGT asset of yours in an income year • The event would have resulted in a gain • At least one of the following applies: o You are a CGT small business entity for the income year o You satisfy the maximum net asset value test o You are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership o You do not carry on a business, but your CGT asset is passively held and is used in a business carried on by a small business entity that is your affiliate, or an entity connected with you • The CGT asset satisfies the active asset test. Active Asset A CGT asset is an active asset at a time if, at that time you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate or another entity that is connected with you (subsection 152-40(1) of the ITAA 1997). However, a CGT asset whose main use by you is to derive rent cannot be an active asset unless its main use for deriving rent was only temporary (paragraph 152-40(4)(e) of the ITAA 1997). That is, even if the asset is used in a business, it will not be an active asset if its main use by you is to derive rent. Active Asset Test A CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997 if: • you have owned the CGT asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period from when you acquired it to the time of the CGT event or the cessation of the business; or • you have owned the CGT asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years during the period specified in subsection 152-35(2) of the ITAA 1997. The test period begins when you acquired the asset, and ends at the earlier of the CGT event, and when the business ceased, if the business ceases in the 12 months before the CGT event (subsection 152-35(2) of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: To determine if Person A and Person B are eligible for the retirement exemption the basic conditions in section 152-10 of the ITAA 1997 must first be satisfied. One of the basic conditions is that the Property must satisfy the active asset test. Person A and Person B leased the Property to an unrelated party for approximately XX years of their XX-year ownership period and they received fixed rental income under this arrangement. As the main use of the Property by Person A and Person B during this time was to derive rent it was not active asset. As such, the Property will not have been an active asset for more than 7 ½ years of their ownership period and therefore the active asset test will not be satisfied. For completeness, even if the Property was considered to be an active asset during the period it is used under the joint venture arrangement the active asset test would still not be satisfied. As the active asset test will not be satisfied the basic conditions will also not be satisfied. As such, Person A and Person B cannot choose to apply the small business retirement exemption in section 152-305 of the ITAA 1997 to disregard all or part of any capital gain they make when they transfer or dispose of the Property to their SMSF.