Private ruling: Capital gains tax and the Small Business concessions
Published: May 2015
Ruling period: Year ending 30 June 2016.
Date scheme commenced: 1 July 2015.

Ruling: Q1: Are you eligible to apply the capital gains tax (CGT) 50% discount under section 115-25 of the Income Tax Assessment Act 1997 (ITAA 1997) upon sale of the property? | A1: Yes. | Q2: Are you eligible to apply the CGT small business 50% discount under section 152-205 of the ITAA 1997 upon sale of the property? | A2: Yes. | Q3: Are you eligible to apply the small business CGT concession under section 152-410 of the ITAA 1997 and roll over the capital gains from the sale of the property to a replacement asset? | A3: Yes.

Relevant facts and circumstances: You formed a partnership X & Y (the partnership) in the 2012-13 financial year. The partnership was formed to acquire a property (the property) in the 2012-13 financial year. The partnership does not carry on a business or engage in any business activities. You set up the partnership for asset protection purposes. The partnership only holds this property for use by a connected company - XYZ Pty Ltd (the company). Contracts for sale for the property were exchanged in the 2012-13 financial year. Settlement occurred Z days later. The property had existing tenants which you could not evict immediately upon settlement. Several portions of the property continued to be tenanted for less than 60 days after settlement. The whole property was then used by the company. You are both Directors and you control the company. The partnership leases the property to the company on commercial terms at market value. The company imports goods for sale. The company uses the property to store the imported goods and also as an office space for running the business. You are considering selling the property to purchase another property at a better location. You submit that you both satisfy the maximum net asset value test as the sum of your and your affiliate's assets does not exceed $6 million. You submit that the company meets the definition of a 'small business entity' under the legislation; claiming the annual aggregated turnover of the company and its connected entities and affiliates is less than $2 million. You would like to apply the CGT discount, and small business CGT concessions to the disposal of the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-5 | Income Tax Assessment Act 1997 section 106-5 | Income Tax Assessment Act 1997 subdivision 115-A | Income Tax Assessment Act 1997 subdivision 152-E | 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 152-205 | Income Tax Assessment Act 1997 section 152-410

Reasons for decision: Summary: As you meet the requirements for discount capital gains under section 115-5 of the ITAA 1997 and the basic conditions for the CGT small business concessions under subsection 152-10(1) of the ITAA 1997, you can choose to apply one or all of: • the 50% discount capital gains (section 115-5 of the ITAA 1997), and • the small business 50% discount concession (section 152-205 of the ITAA 1997), and • the small business rollover concession (section 152-410 of the ITAA 1997). | Detailed Reasoning - 50% discount capital gains: Section 115-5 in subdivision 115-A of the ITAA 1997 allows an entity to claim a discount on a capital gain where the capital gain was made by an eligible entity. Under section 115-15 of the ITAA 1997 the gain must be made after 21 September 1999. Section 115-10 of the ITAA 1997 is the provision which states who can make a discount capital gain. To be eligible for the capital gains tax discount the capital gain must have been made by: • an individual, • a complying superannuation entity, • a trust; or • a life insurance company in relation to a discount capital gain from a capital gains tax event in respect of a capital gains tax asset that is a virtual PST asset. There are special rules for partnerships. Under section 106-5 of the ITAA 1997, a capital gain or capital loss arising from a CGT event that happens in relation to a partnership or to one of its assets is made by the partners individually, not the partnership. A partnership cannot make a capital gain or capital loss. This means that any capital gain or loss that arises belongs proportionately to each individual partner, depending on each partner's interest as per the partnership agreement. In your case, each of the partners is an individual. Your acquisition date for the purposes of calculating CGT in the 2012-13 financial year, more than 12 months before the CGT event. Further CGT event A1 is not a capital gain excluded from being a discount capital gain under subsection 115-25(3) of the ITAA 1997. Accordingly each of the partners of the partnership will qualify for the 50% CGT discount. | Detailed Reasoning - Small business 50% discount concession basic conditions: In order to be eligible for the small business CGT concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997: a) a CGT event happens in relation to an asset that the taxpayer owns b) the event would otherwise have resulted in a capital gain c) one or more of the following applies a. the taxpayer satisfies the maximum net asset value test b. the taxpayer is a "small business entity" for the income year c. the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or d. the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year; and a) the asset satisfies the active asset test. | Detailed Reasoning - Passively held assets: The conditions in subsection 152-10(1A) are satisfied in relation to the CGT asset in the income year if: (a) your affiliate, or an entity that is connected with you, is a small business entity for the income year; and (b) you do not carry on a business in the income year (other than in partnership); and (c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and (d) in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset. | Detailed Reasoning - Connected with - control of a company: An entity controls a company if the entity beneficiary owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company. | Detailed Reasoning - Active asset test: The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if: • 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 detailed below, or • you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period. 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, or an entity connected with you. A CGT asset is not an active asset if its main use is to derive rent unless this was temporary (subsection 152-40(4) of the ITAA 1997). In this case, the property owned by the partners was used in the course of carrying on a business by the company for more than half of the ownership period. The company is a small business entity and the partners are the shareholders of the company. We accept that the company is connected to the partners. Therefore, the property will satisfy the basic conditions for the small business concessions. Accordingly the partners will qualify for the 50% active asset reduction. The combined effect of the 50% discount capital gains in question 1 and applying this section would be to reduce the original capital gain by a total of 75%. | Detailed Reasoning - Small business rollover concession: Section 152-410 of the ITAA 1997 provides that you can choose to obtain a rollover for a capital gain if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain. Section 152-415 of the ITAA 1997 explains that if you choose the rollover, you can choose to disregard all or part of each capital gain to which Subdivision 152-E of the ITAA 1997 applies. There are rollover conditions that must be satisfied by the end of the replacement asset period. This period starts one year before and ends two years after the last CGT event that occurs in the income year for which you choose the roll over. If the rollover conditions are not met within the replacement asset period, the gain will become assessable. You satisfy the rollover conditions where you meet all the following conditions: • you acquire one or more CGT assets as replacement assets or make a capital improvement to one or more existing assets, or both, within the replacement asset period • the replacement asset, or the asset to which the capital improvement was made, is an active asset at the end of the replacement asset period (a depreciating asset such as plant can be a replacement asset) • the capital gain that is being rolled over is not more than the sum of the following: • the amount paid to acquire the replacement asset (that is, the first element of the cost base of the replacement asset) • any incidental costs incurred in acquiring that asset, which can include giving property (that is, the second element of the cost base of the replacement asset), and • the amount expended on capital improvements to one or more assets that were acquired or already owned (that is, fourth element expenditure).