Private ruling: Capital gains tax (CGT) - small business concessions
Date of advice: 10 March 2017
Published: August 2017
Ruling period: Income year ending 30 June 20YY.
Date scheme commenced: 1 July 20XX.

Ruling: Q1: Are you eligible for the CGT small business 50% active asset reduction in relation to the disposal of your ownership interest in the property in the 20XX-YY income year under Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Are you eligible to make the choice to apply the CGT small business retirement exemption to any capital gain made on the sale of your ownership interest in the property in the 20XX-YY income year under Subdivision 152-B of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: After 20 September 1985, you and your former spouse (Person A) purchased a property (the Property) for $XXX,XXX as joint tenants. The Property consists of a split level single storey building, outbuildings and a large backyard. Settlement on the purchase of the Property occurred a number of months after the purchase contract was entered into. You and Person A were partners in a partnership (the Partnership) and rental income from the Property was included in the Partnership's assessments, which was distributed to you and Person A. Person A operated their sole trading business (the Business) from the Property after it was purchased and had employed a number of staff, with some of the staff parking their motor vehicles in the rear of the Property. A number of years after the Property was purchased, Person A set up a business (the Company). Person A was the sole shareholder and director of the Company. Person A engaged the services of a mortgage broker in relation to the operations of the Company who had their own office at the Property and was provided with a motor vehicle. A number of years after the Company was set up; part of the Property was leased to an unrelated party (Person B) who paid the costs to erect walls to divide the building space into two offices, with Person B having a small area of the building space. Person B did not use any of the backyard area and this arrangement lasted for a number of years. A number of years after it had been set up, the Company was deregistered. In the same income year part of the rear Property yard was rented to an unrelated part for a number of months. Around fifteen years after the Property had been purchased, you and Person A separated. During the same income year Person A sold the Business and ceased operating a business at the Property. As part of the sale agreement of the Business, the purchaser had a lease over part of the Property with the purchaser leasing an area located at the front of the Property. The Business was on sold to another to another purchaser who rented the space in the Property from the original purchaser. Person A had either used the whole of the Property or more than 50% of the building and over 50% of the total land area of the Property in relation to their business operations during the period of your ownership in the Property until the business operations had ceased. In the following year a family law case was concluded in the courts. Over twelve months later a court order was issued for the Property to be sold. A number of months later the Property was sold for $X,XXX,XXX. The net value of the assets of you and your affiliates and connected entities is less than $6million at the time the Property was sold. You have calculated that you have made a capital gain on the sale of your ownership interest the Property, calculated using the CGT discount method. You will apply the 50% CGT discount to the capital gain. You were over 55 years of age when the Property was sold. You are a full-time employee and there has been no reduction in the hours you work, or a change in your activities to those prior to the sale of the Property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subdivision 152-B | Income Tax Assessment Act 1997 Subdivision 152-C

Reasons for decision: Summary: Summary You have met the basic conditions for the CGT small business 50% active asset reduction to automatically apply in your situation. You have also met the necessary conditions for you to be able to choose to disregard part of the capital gain made on the sale of your ownership interest in the Property under the CGT small business retirement exemption. Detailed reasoning | Detailed Reasoning - CGT small business 50% active asset reduction: The CGT small business 50% active asset reduction will apply automatically if the basic conditions that are common to all the concessions are satisfied. To satisfy the basic conditions the following must occur: (a) a CGT event happens in relation to a CGT asset of yours in an income year; (b) the event would have resulted in a gain; (c) 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; ● 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; and (d) the CGT asset satisfies the active asset test | Detailed Reasoning - CGT small business retirement exemption: You may choose to apply the small business retirement exemption to disregard all or part of a capital gain if you are not eligible for the CGT small business 15-year exemption when: ● the basic conditions as outlined above have been satisfied; and ● you keep a written record of the CGT amount you choose to disregard. Application to your situation After reviewing the facts of your situation we have determined that the CGT small business 50% active asset reduction will automatically apply because you have satisfied the basic conditions and that you can choose to apply the CGT small business retirement exemption because: ● you disposed of your ownership interest in the property in the 20XX-YY income year; ● you have calculated that you made a capital gain calculated using the CGT discount method and will apply the 50% CGT discount to the capital gain; ● the net value of the assets of you and your affiliates and connected entities is less than $6million; ● your ownership period of your interest in the property was over 15 years; ● the property was used by Person A in relation to their business operations for over 7.5 years; and ● you were over 55 years of age when you sold your ownership interest in the property As it has been determined that you satisfy the basic conditions, the capital gain amount left after you have applied the 50% CGT discount will be reduced by the CGT small business 50% active asset reduction resulting in 25% of the original capital gain amount remaining. If you choose, you will be able to apply the CGT small business retirement exemption to the remaining 25% capital gain amount after any capital losses have been applied.