Private ruling: CGT - Small Business Concessions
Published: March 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Do you satisfy the basic conditions for the small business capital gains tax concessions? | A1: Yes. | Q2: Are you eligible for the small business 15-year exemption in relation to the disposal of the property? | A2: No

Relevant facts and circumstances: You bought a property over 15 years ago. You rented the property for a period of time. You moved into the property to run your own business. You rented out half of the property after running your business from the property for more than 7 ½ years but continued running your business from the other half of the property. You subsequently leased both halves of your property. You are now considering disposing of the property. Your related entities net assets are less than $6 million. Your related turnover is less than $2 million You are over 55 years of age. You retired a number of years ago.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-105

Reasons for decision: Summary: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in the gain (c) at least one of the following applies: (i) you are a small business entity for the income year (ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (a) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Basic condition (a) CGT event A1 under section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when the property is sold and this basic condition will be satisfied. Basic condition (b) The event will result in a capital gain and this basic condition will be satisfied. Basic condition (c) The terms of the maximum net asset value test are specified in section 152-15. It states that the $6 million threshold which must not be exceeded includes the net value of your CGT assets as well as of entities connected with you and your affiliates and entities connected with your affiliates. You have stated that your net assets are less than $6 million. Therefore you satisfy the maximum net asset value test. Basic condition (d) This condition requires that the active asset test in section 152-35 of the ITAA 1997 is satisfied. This test is satisfied 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 period detailed below 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 7 ½ years during the period detailed below: The period: (a) begins when you acquired the asset and (b) ends at the earlier of: (i) the CGT event and (ii) if the relevant business ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) when the business ceased. Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is connected with you, in the course of carrying on a business. Section 152-35 of the ITAA 1997 explains that an asset will be an active asset if you have owned the asset for more than 15 years and it was an active asset for a total of at least 7 ½ years from the time when you acquired the asset until the CGT event. Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. In your case, you owned the property for more than 15 years and the property has been used to derive rent during your ownership. However, for a period greater than 7 ½ years the property was used to derive income from your business. Therefore the active asset test and this basic condition will be satisfied. Summary for basic conditions Based on the information provided, you have satisfied the basic conditions required to be eligible for the small business CGT concessions. | Detailed Reasoning - 15-year exemption: Subsection 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if all of the following conditions are satisfied: (a) you satisfy the basic conditions (b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event (c) you are either: a. 55 or over at the time of the CGT event and the event happens in connection with your retirement; or b. 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 Explanatory Memorandum (EM) to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession: 1.68 One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement. 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 2011-12 (NAT 3359) 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. In this case, you ran a business from the property before renting it out. You retired a number of years ago and are now looking to sell the property. 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 land. You ceased working a significant period of time before the disposal of the property. We do not consider that there is a connection with your retirement and the disposal of the property. Accordingly, you do 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.