Private ruling: CGT - small business concessions - retirement exemption
Published: July 2012
Ruling period: 1 July 2010 to 30 June 2011.
Date scheme commenced: 1 July 2010.

Ruling: Q1: Under subsection 152-80(2) of the Income Tax Assessment Act 1997 (ITAA 1997), can the taxpayer access the $500,000 retirement exemption that their spouse would have had access to, in addition to their own $500,000 retirement exemption? | A1: Yes.

Relevant facts and circumstances: The taxpayer was the beneficiary of the estate of their late spouse. The taxpayer and their spouse acquired farming property as tenants in common and carried on farming operations on the land through a partnership together. Succession planning was undertaken within the family to begin an intergenerational transfer of the farm land and business assets to the children. The taxpayer's spouse passed away unexpectedly, while this process was occurring. The taxpayer ceased being actively involved in the farming partnership. Once probate was granted, the interest in the title held by the taxpayer's spouse as tenant in common was transferred to the taxpayer. Shortly thereafter, the total interest held by the taxpayer in the farming property was transferred to the children by way of a contract of sale. Upon transfer, a capital gain was realised on the interest in the property acquired by the taxpayer. The taxpayer is over 55 years of age and satisfies the basic conditions for relief under section 152-10 of the ITAA 1997. The asset satisfied the active asset test. The following concessions were applied: · The CGT discount to reduce the taxable gain. · The CGT small business 50% active asset reduction to further reduce the gain. The taxpayer intends to apply the retirement exemption, having previously not accessed any of their personal $500,000 lifetime limit under Section 152-305 ITAA 1997. Upon transfer, a capital gain was realised on the interest in the property acquired by the taxpayer by way of transmission under the will of their late spouse. Just prior to their death, the deceased satisfied the basic conditions for relief under section 152-10 of the ITAA 1997. They had not used any of their retirement exemption personal $500,000 lifetime limit.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-80 | Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Section 152-320

Reasons for decision: Summary: The legislative references referred to within this document are from the ITAA 1997, unless otherwise stated. | Detailed Reasoning - Law:: There are a number of exemptions that taxpayers can use to reduce or disregard any capital gain they make. The small business retirement exemption is contained in Subdivision 152-D. A taxpayer may use the retirement exemption to disregard all or part of their gain if they satisfy certain conditions. Section 152-320 states that an individual has a retirement exemption cap of $500,000. Under section 152-80 a taxpayer may be eligible for the small business concessions if they make a capital gain on an asset within two years of a person's death, if that asset is or was part of that individual's estate, and the taxpayer is: · A beneficiary of the deceased estate · Legal personal representatives, or · Trustee or beneficiary of the testamentary trust. | Detailed Reasoning - Preliminary issues: Section 128-15 applies to the 50% interest acquired by the deceased as it passed to the taxpayer as beneficiary. | Detailed Reasoning - Section 152-80: As the deceased's interest forms part of their estate and it passes to the taxpayer as their beneficiary, and the sale happened within 2 years of the death, if the taxpayer would have been entitled to reduce their capital gain under Division 152, then the taxpayer, as the beneficiary, is entitled to reduce a capital in the same way as the deceased would have been (subsection 152-80(1) and (2)). | Detailed Reasoning - Retirement exemption: If the sale of their interest happened immediately before the deceased's death then according to the facts, the deceased would have satisfied the basic conditions in Subdivision 152-A. Consequently, the deceased would have been able to choose to disregard all or part of the capital gain arising from the disposal of their interest (paragraph152-305(1)(a)). The taxpayer, as the beneficiary, is therefore entitled to reduce the capital gain in the same way as the deceased would have been entitled (subsection152-80(2)). In addition, if the deceased was not at least 55 years of age at the time of their death, there is no requirement to contribute the CGT exempt amount to a complying super (or similar) fund. The taxpayer is entitled to choose to exempt the remaining capital gains on the deceased's interest up to the deceased's CGT retirement exemption limit. Under section 152-320 an individuals CGT retirement exemption limit is $500,000. The interaction between section 152-320 and section 152-80 allows the beneficiary to apply the concession in the same way as the individual would have been entitled to. In this case, just prior to the deceased's death they would have been able to apply the retirement exemption up to the amount of $500,000. As a result the taxpayer will be able to use the deceased's CGT retirement exemption limit, in addition to their own unused CGT retirement exemption limit, when applying the retirement exemption to the capital gains arising from their interests in the property. | Detailed Reasoning - Conclusion: Based on the legislative intent, it is considered that subsection 152-80(2) entitles the taxpayer, as the beneficiary of the deceased, to choose to disregard the remaining capital gain on the deceased's interest under section 152-305 to the extent that the deceased's CGT retirement exemption limit is not exceeded.

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