Private ruling: Capital gains tax
Date of advice: 11 July 2016
Published: August 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Does the 50% capital gains tax discount apply automatically if the requirements in section 115-5 of the Income Tax Assessment Act 1997 are satisfied? | A1: Yes.

Relevant facts and circumstances: You have realised a capital gain on the sale of a business. You established the business approximately five years ago. You wish to contribute as much as you can to super using the small business retirement exemption.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-5. | Income Tax Assessment Act 1997 Section 115-5. | Income Tax Assessment Act 1997 Division 115.

Reasons for decision: Summary: Section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the method of calculating your net capital gain for an income year. The following provide a summary of the steps involved. Step 1. Reduce the capital gains you made during the income year by the capital losses (if any) you made during the income year. … Step 2. Apply any previously unapplied net capital losses from earlier income years to reduce the amounts (if any) remaining after the reduction of capital gains under step 1 (including any capital gains not reduced under that step because the capital losses were less than the total of your capital gains). … Step 3. Reduce by the discount percentage each amount of a discount capital gain remaining after step 2 (if any). … Step 4. If any of your capital gains (whether or not they are discount capital gains) qualify for any of the small business concessions in Subdivisions 152-C, 152-D and 152-E, apply those concessions to each capital gain as provided for in those Subdivisions. … Step 5. Add up the amounts of capital gains (if any) remaining after step 4. The sum is your net capital gain for the income year. 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 capital gains tax (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, you made a capital gain on the sale of the business. You are not eligible to choose to use the indexation method as you acquired the asset after 21 September 1999. You held the asset for longer than 12 months but you did not want to apply the general CGT discount. However, the CGT discount in Division 115 of the ITAA 1997 does not require a choice to be made for its application but applies automatically if its conditions are satisfied. You cannot make a choice for it not to apply. Therefore the CGT discount will apply to your capital gain.