Private ruling: CGT small business concessions
Published: May 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the property satisfy the active asset test? | A1: Yes | Q2: Are you entitled to apply the 15 year exemption to disregard any capital gain from the sale of the property pursuant to section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No

Relevant facts and circumstances: You purchased the property more than 15 years ago You carried on activities in partnership on the property. The partnership registered for GST and had a valid ABN. The partnership kept detailed record of activities undertaken and had financial statements and income tax returns prepared each financial year. You meet the maximum net asset value test. The partnership operations ceased during the 200X financial year and the GST registration for the partnership was cancelled form that date. You have not carried out any further income earning activities. Low level general maintenance has since been carried out on the property. After a period of time you began to market the property for sale. There have been several unsuccessful negotiations in relation to the sale of the property. You believe the global financial crisis has hindered the sale of the property. You have created a website for the property and have also advertised the property for sale in the local newspapers and with local real estate agents. The property is currently listed with real estate agents. Due to many potential sales not eventuating, the listing price of the property has been reduced significantly. You are over 55 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-10 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-105

Reasons for decision: Summary: A capital gains tax (CGT) asset will satisfy the active asset test if: (a) 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, or (b) 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 7½ years during the test period. The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business. Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you. Taxation Ruling TR 97/11 provides the Commissioner's view of the factors that are considered important in determining if you are in business for tax purposes. The factors are: • whether the activity has a significant commercial purpose or character • whether the taxpayer has more than just an intention to engage in business • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity • whether there is regularity and repetition of the activity • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation or sporting activity. No one indicator is decisive. The indicators must be considered in combination and as a whole. Application to your circumstances Having regard to the way the partnership has prepared their income tax returns and the facts provided, we consider that the partnership was carrying on a business for the relevant period. The property in question has been owned by you for more than 15 years and has been used by the partnership in the course of carrying on a business for seven and a half years. Therefore, the property will satisfy the active asset test. Section 152-105 of the ITAA 1997 contains the small business 15 year exemption for individuals. Under this section, you can disregard the capital gain from the disposal of a CGT asset if all of the following conditions are satisfied: (a) the basic conditions contained in section 152-10 of the ITAA 1997 are satisfied (b) you continuously owned the CGT asset for the 15 year period ending just before the CGT event (c) if the CGT asset is a share in a company or an interest in a trust, the company or trust had a significant individual for a total of at least 15 years (d) either: (i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement, or (ii) you are permanently incapacitated at the time of the CGT event. Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. The provisions relating to the small business 15 year exemption do not define what is meant by the phrase 'in connection with a taxpayer's retirement', nor does it give any indication of the degree of retirement required in order to take advantage of this concession. The words 'in connection with' can apply where the CGT event occurs sometime after retirement. This type of case would depend on its own particular facts, and would need to be considered on a case-by-case basis. The Advanced guide to capital gains tax concessions for small business 2012-13 (NAT 3359) ( Advanced guide ) provides the following example: A small business operator 'retires' and his children take over the running of the business. Within six months, they sell some business assets and make a capital gain. Several reasons may have prompted the sale of the assets. If there is no relevant connection with the small business operator's business, the requirement would not be satisfied. However, if it can be shown that the reason for the disposal of the assets is connected to retirement and the later sale is integral to the small business operator's retirement plan, the sale may be accepted as happening in connection with retirement. Application to your circumstances In your case, it is accepted that you meet the basic conditions contained in section 152-10 of the ITAA 1997 due to the following: • a CGT event will occur when you dispose of the property • the event will result in a gain • you satisfy the maximum net asset value test; and • as discussed above, the asset meets the active asset test. You have owned the property, continuously, for more than 15 years. However, we do not consider that the CGT event will occur in connection with your retirement. Although the Advanced Guide provides that retirement can occur sometime before the CGT event, there would still need to be a connection between your retirement and the sale of the property. You have both been effectively retired for a significant period of time. We acknowledge that the market conditions may have had some impact on the sale of the property. However, we note that the major efforts to dispose of the property did not commence for some time after your effective retirement. Due to the time that has elapsed, we do not consider that there is a sufficient connection with your retirement and the future disposal of the property. Accordingly, you will not satisfy the requirement in paragraph 152-105(d) of the ITAA 1997 and will not be eligible to apply the 15 year exemption to the capital gain.