Private ruling: CGT - small business concessions
Published: August 2013
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you eligible for the small business 15 year exemption on the disposal of the 50% interest on the property you inherited which was originally owned by relative A? | A1: Yes. | Q2: Are you eligible for the small business 50% reduction on the disposal of the 50% interest on the property you inherited which was originally owned by relative B? | A2: Yes. | Q3: Are you eligible for the small business retirement exemption on the disposal of the remaining 50% interest on the property you inherited which was originally owned relative B? | A3: Yes.

Relevant facts and circumstances: You had two relatives, A and B, who purchased a property after 1985 as joint tenants. A and B had joint ownership in a partnership that operated a business. The property was used for multiple purposes. More than 50% of the land was used in a business which was run by both relatives. The remaining amount of land was leased out to an unrelated party. In the 2009/10 financial year the turnover of the business was greater than the income generated from leasing the remaining land. Relative B passed away in the 200X financial year and their share of the property was transferred to relative A. Relative A continued to run the business and lease out part of the property. Relative A passed away in the relevant financial year and after a dispute with the will the property was transferred to you in the subsequent financial year. Both A and B had joint ownership in the partnership. The property was used for at least seven and half years in the partnership business. Neither A nor B had previously accessed the $500,000 retirement exemption. Relative A was over 55 years old when they passed away. You applied for a private ruling and have been granted an extension of time under section 152-80(3) of the Income Tax Assessment Act 1997 (ITAA 1997) until the 30/06/2015 to sell the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-80 | Income Tax Assessment Act 1997 Subdivision 152-B | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 Section 152-205 | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 Section 152-305 | Income Tax Assessment Act 1997 Section 152-320

Reasons for decision: Detailed Reasoning - Are you eligible to claim the concessions?: Section 152-80 of the ITAA 1997 considers the implications of a CGT event occurring within 2 years of individual's death. This section applies if: (a) a CGT asset: (i) forms part of the estate of a deceased individual; or (ii) was owned by joint tenants and one of them dies; and (b) any of the following applies: (i)the asset devolves to the individual's legal personal representative; (ii) the asset passes to a beneficiary of the individual; (iii)an interest in the asset is acquired by the surviving joint tenant or tenants (as the case may be) as mentioned in section 128-50; (iv) the asset devolves to a trustee of a trust established by the will of the individual; and (c) the deceased individual referred to in subparagraph (a)(i) or (ii) would have been entitled to reduce or disregard a capital gain under this Division if a CGT event had happened in relation to the CGT asset immediately before his or her death; and (d) a CGT event happens in relation to the CGT asset within 2 years of the individual's death In your case, relative A passed away and the property they operated their business on was transferred to you under their will. You have already been granted an extension of time in a previous ruling, therefore, we just need to consider whether relative A would have been entitled to reduce or disregard a capital gain under this Division if a CGT event had happened immediately before their death. | Detailed Reasoning - Would relative A have satisfied the conditions immediately before their death?: To qualify for the small business capital gains tax (CGT) concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'. Each concession also has further requirements that you must satisfy for the concession to apply (except for the small business 50% active asset reduction which applies if the basic conditions are satisfied). | Detailed Reasoning - Basic Conditions: A capital gain that you make may be reduced or disregarded under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) if the following basic conditions are 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 · the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and · at least one of the following applies; - you are a small business entity for the income year - you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 - you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or - you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you. The active asset test is contained in section 152-35 of the ITAA 1997. Where you have owned the asset for more than 15 years, the active asset test is satisfied if the asset was an active asset of yours for at least 7 and a half years of the test period detailed below. 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 in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows). A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. Section 152-40 of the ITAA 1997 defines what an active asset is. For a CGT asset of a business to be an active asset, it must firstly satisfy one of the positive tests in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997. In your case, although the property was partly used to derive rent it was also used in a business. TD 2006/78 considers the implications of an asset that is used for multiple income producing purposes where one of the purposes is an exception under subsection 152-40(4) of the ITAA 1997. In determining if the main use of the land is to derive rent, it is appropriate to consider a range of factors. In your case, a substantial proportion by area of the land is used for business purposes. As well, the business proportion of the land derives the vast majority of the total income. In all circumstances, we consider the main use of the land in your case is not to derive rent and accordingly the land is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997. For a period of at least seven and half years of the period of ownership, the property was used to produce business income. Accordingly the partnership, which your relatives are connected to, meets the active asset test in relation to the property. In this case, it is accepted that relative A would have met the basic conditions immediately before their death, due to the following: · a CGT event will occur when you sell the property · the event will result in a gain based on the market value of the house at the time of your first relative's death · the partnership is a small business entity, and · the asset meets the active asset test. The further requirements for each individual concession are discussed below. | Detailed Reasoning - Small business 15 year exemption -relative A's original 50% ownership: For an individual to be eligible for the small business 15-year exemption you must satisfy the basic conditions and these further conditions: (a) you continuously owned the CGT asset for a 15 year period ending just before the CGT event; and (b) 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. The property was acquired after 1985 and the intention is to dispose of it before 30 June 2015. A 50% portion of the property was continuously held by relative A for more than 15 years and there were no changes in ownership on their portion. Relative A was over the age of 55 when they passed away. It is not necessary for the CGT event to have happened in relation to their retirement. | Detailed Reasoning - Small business 50% active asset reduction -relative B's 50% ownership: To apply the small business 50% active asset reduction, you only need to satisfy the basic conditions. There are no further requirements. As relative A satisfies the basic conditions, any capital gain from the sale of the property that remains after applying any current year capital losses, any unapplied prior year net capital losses, and the CGT discount (if applicable), is reduced by 50%. | Detailed Reasoning - Small business retirement exemption -relative B's 50% ownership: Section 152-305 of the ITAA 1997 contains the general provision that allows exemption of the capital gain. If you are an individual, you can disregard all or part of a capital gain if: (a) you satisfy the basic conditions in section 152-10 of the ITAA 1997 for the gain; and (b) if you were under 55 years of age just before you received an amount of capital proceeds from the CGT event, you roll over an amount equal to the exempt amount under the ETP provisions. (If you were 55 or older, there is no requirement to roll over any amount.) It has already been established that the partnership, and therefore relative A, satisfy the basic conditions contained in section 152-10 of the ITAA 1997. Relative A was also over the age of 55 before they passed away and therefore condition (b) is not relevant. Relative A would have been eligible to disregard a capital gain under this provision as they had not accessed any of the $500,000 limit contained in section 152-320 of the ITAA 1997. | Detailed Reasoning - Are you eligible for the small business concessions?: As relative A would have been eligible for all the small business concessions discussed above, immediately before their death, you have also satisfied all the requirements set out by section 152-80 of the ITAA 1997. You have satisfied all the required conditions and are entitled to apply the small business concessions to the capital gain that will occur when you sell the property.