Private ruling: CGT small business concessions
Published: August 2014
Ruling period: Income year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will you be eligible to disregard any capital gain made on the disposal of properties held for x years under the Capital Gains Tax (CGT) 15-year exemption concession for small business if you choose to retire? | A1: Yes | Q2: Will you be eligible to disregard any capital gain made on the disposal of properties not held for x years under the CGT 15-year exemption concession for small business? | A2: No | Q3: Will you be eligible to disregard any capital gain made on the disposal of properties not held for x years under the CGT retirement exemption concession for small business? | A3: Yes | Q4: Will you be eligible to reduce any capital gain made on the disposal of properties not held for x years under the CGT 50% active asset reduction for small business? | A4: Yes

Relevant facts and circumstances: You conduct a primary production business. You own a number of parcels of land which have been used in your business for their entire period of ownership. Some of the parcels of land have been held for x years while others have been held for less than x years. One of the parcels of land you have held for less than x years has been amalgamated with a parcel of land held for less than x years. You intend to retire and sell the parcels of land after you turn x.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-30 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 152-105 | Income Tax Assessment Act 1997 section 152-305 | Income Tax Assessment Act 1997 section 152-320 | Income Tax Assessment Act 1997 section 328-125

Reasons for decision: Detailed Reasoning - Small business CGT concession basic conditions: 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 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. Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when your ownership in a CGT asset (eg. land or buildings) is transferred to another entity. 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. However, subsection 152-40(4) explains that an asset whose main use is to derive rent cannot be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use. Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if: a) either entity controls the other entity in a way described in this section; or b) both entities are controlled in a way described in this section by the same third entity. Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: if the other entity is a company - beneficially 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. Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership, or • 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 and a half years. In your case, you intend to transfer ownership interest in properties that will result in a capital gain. You have provided that you carry on a business and that your annual turnover (including connected entities and affiliates) is less than $2 million. Further, all the relevant assets have been used in the course of carrying on that business for the entire period of ownership. Accordingly, you satisfy all the basic conditions necessary to be eligible for the CGT small business concessions. As you satisfy all the basic conditions, you automatically qualify for the 50% active asset reduction concession. | Detailed Reasoning - Small business 15-year exemption: The small business 15-year exemption takes priority over the other small business concessions and the CGT discount. If the small business 15-year exemption applies, you entirely disregard the capital gain so there is no need to apply any further concessions. Further, you do not reduce the capital gain by any capital losses before you apply the 15-year exemption concession. Section 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: i. 55 or over at the time of the CGT event and the event happens in connection with your retirement; or ii. permanently incapacitated at the time of the CGT event. In your case: • you satisfy the basic conditions • you are aged over 55 • you have advised that you intend to retire However, you have not continuously owned all the sections of land for a period of 15 years. You have argued the purchase of x should be regarded as having been purchased at the same time as x as it was amalgamated with that section to become section x. The Commissioner has issued CGT Determination TD8 which provides that where a person has amalgamated two adjoining titles of land and one property was acquired pre-CGT and the other after September 1985, there are not CGT consequence on the amalgamation but the land acquired after 19 September 1985 remains subject to the CGT provision and the pre-CGT land remains exempt. It is considered the same principle applies to the ownership requirement in relation to the 15 year exemption. Accordingly, you satisfy all the conditions necessary to be eligible for the small business 15-year exemption concession for the properties you have held for longer than 15 years. But you will not be eligible for the 15 year-exemption for the disposal of properties you have not held for 15 years. The part of property x which you have held for 15 years will be eligible while the remainder will not. | Detailed Reasoning - Small business retirement exemption: You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. If you are an individual who chooses the retirement exemption, you do not need to terminate any activity or cease business. This concession allows you to provide for your retirement. Subsection 152-305(1) of the ITAA 1997 explains that if you are an individual, you can choose to disregard all or part of a capital gain if: • you satisfy the basic conditions • you keep a written record of the amount you chose to disregard (the CGT exempt amount), and • if you are under 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA). If you are 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA even though you may have been under 55 years old when you received the capital proceeds. Subsection 152-320(1) of the ITAA 1997 provides that an individual's CGT retirement exemption limit at a time is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual under this Subdivision. The consequences of applying the retirement exemption to your capital gain means that your lifetime limit of $500,000 for the retirement exemption will be reduced by the amount excluded under this exemption. In your case: • you satisfy the basic conditions • you are over 55 years of age Therefore, provided you keep a record of the amount you wish to disregard and you do not exceed your individual retirement exemption limit, you will satisfy the necessary conditions to be eligible for the small business retirement exemption.