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

Ruling: Q1: As a result of the sale of a property will the capital gain from the sale of shares previously rolled over under subdivision 152-E of the Income Tax Assessment Act 1997 (ITAA 1997) crystallise through capital gains tax (CGT) event J2? | A1: Yes | Q2: If the capital gain from the sale of the shares has now crystallised will the resulting capital gain from CGT event J2 be eligible for the 50% discount under division 115 of the ITAA 1997? | A2: No | Q3: If the capital gain from the sale of the shares has now crystallised will the capital gain from CGT event J2 be eligible for the 50% active asset reduction under subdivision 152-C of the ITAA 1997? | A3: No | Q4: If the capital gain from the sale of the shares has now crystallised will the capital gain from CGT event J2 be eligible for the retirement exemption under subdivision 152-D of the ITAA 1997? | A4: Yes | Q5: If the capital gain from the sale of the shares has now crystallised will the capital gain from CGT event J2 be eligible for further rollover relief under subdivision 152-E of the ITAA 1997? | A5: Yes

Relevant facts and circumstances: You derived a capital gain as a result of the sale of shares. You deferred all of the capital gain made from the disposal of the shares under the capital gains tax (CGT) small business rollover concession by purchasing a business. The purchase of the business included Property A. You state that approximately X% of the land was used for business purposes. The X% private portion is the portion of land forming part of your residence. Property A has never been subdivided. The business commenced at Property A immediately following its purchase. The turnover of the business in the 2012-13 financial year was significantly less than $2 million. Between mid-200X and the beginning of 20XX you incurred expenditure on equipment and improvements for Property A. You received information that the area was to be rezoned, upon this advice you decided to relocate your business to another property. You purchased two lots, making up Property B in 200Y. Between the end of 20YY and the beginning of 2013 you incurred expenditure on equipment and improvements for Property B. You state that you may be purchasing some equipment or making some capital improvements for Property B in the future (within two years of the disposal of Property A). You state that you planned to use the sale proceeds from the sale of Property A to fund the development of required facilities at Property B. You decided to progress with the relocation to Property B as originally planned but before the sale of the Property A. You state that you decided to lease Property A on a short term, non-exclusive basis. The non-exclusive lease meant that the lessee did not have exclusive right of use from the property and that your business could also make use of the property. For approximately X months of your X year ownership period of Property A, it was leased to an unrelated entity. You expect to dispose of Property A in the relevant financial year. You will be under 55 years of age at the time of the anticipated disposal of the property. You have not utilised any of your CGT life time retirement exemption limit. You state that you intend to utilise the small business retirement exemption concession for the capital gain made on the disposal of Property A by contributing an amount of no more than $500,000 into a complying superannuation fund within 7 days of choosing to do so. You have provided information showing that the net assets of you and your connected entities total more than $6 million. You state that entities connected with you do not have an annual business turnover that exceeds $2 million, either individually or collectively. You satisfy the conditions to eligible for the small business rollover concession and the retirement exemption concession as established in the prior private ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-185 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-305 | Income Tax Assessment Act 1997 Section 152-320 | Income Tax Assessment Act 1997 Section 152-410 | Income Tax Assessment Act 1997 Section 152-415

Reasons for decision: Summary: As a consequence of selling the property, a replacement asset acquired after a prior sale of shares, CGT event J2 will occur as a result of a replacement asset ceasing to be your active asset. The gain that crystallises from this event will be eligible for the small business retirement exemption and further small business rollover relief but will not be eligible to the general CGT discount or the active asset 50% reduction. | Detailed Reasoning - CGT event J2: Under subsection 104-185(1) of the ITAA 1997, CGT event J2 happens if an entity chooses the rollover concession and a change in circumstance happens. When the change occurs, the deferred capital gain will crystallise. Subsection 104-185(2) of the ITAA 1997 provides that a change in circumstance will include when a replacement asset ceases to be your active asset. So accordingly when you dispose of a replacement asset, CGT event J2 happens in addition to the CGT event A1. The gain that arises out of the J2 event being the crystallised deferred gain will be specifically excluded from the general discount under subsection 115-25(3) of the ITAA 1997. Further any gain under event J2 will not be eligible for the 15 year exemption and the 50% active asset reduction under subsection 152-40(4) of the ITAA 1997. However the gain will still eligible for the retirement exemption and rollover relief provided it meets the specific requirements related to those events. Importantly, if you dispose of a replacement or capital improved asset, another CGT event (CGT event A1) happens in addition to CGT event J2. Any capital gain you make from CGT event A1 on the disposal of the replacement or capital improved asset may qualify for any of the small business CGT concessions, if the relevant conditions are satisfied. | Detailed Reasoning - 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 choose the retirement exemption, you do no need terminate any activity or cease business. This concession allows you to provide for your retirement. Subsection 152-305(1) of the TIAA 1997 explains that if you are an individual, can choose to disregard all or part of a capital gain if: • You satisfy the basic conditions • You keep written records of the amount you chose to disregard, 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 saving account (RSA). You must make the contribution: • when you made the choice to use the retirement exemption, or when you received the proceeds (whichever is later), or • when you made the choice to use the retirement exemption if the relevant event is CGT event J2, J5 or J6. 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. | Detailed Reasoning - Small business rollover relief: Section 152-410 of the ITAA 1997 provides that you can choose to obtain a roll-over under Subdivision 152-E for a capital gain if the basic conditions in Subdivision 152-A are satisfied for the gain. Section 152-415 of the ITAA 1997 explains that if you choose the roll-over, you can choose to disregard all or part of each capital gain to which Subdivision 152-E 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). A replacement asset can include an asset that is otherwise exempt from CGT on disposal (eg. a car or business equipment), provided it is or becomes and active asset of the taxpayer. This is because the effect of any reinstatement of the gain under CGT event J2, J5 or J6 is to reinstate the originally rolled over gain, and not any gain on the exempt replacement asset itself. Goodwill acquired on the acquisition of a new business would also satisfy the requirement of a acquiring a replacement asset, this is because goodwill is considered an active asset of a business. | Detailed Reasoning - Application to your circumstance: In your circumstances you have sold the property which was a replacement asset you had previously acquired after deferring the capital gain for the sale of shares under division 152E of the ITAA 1997. Accordingly the gain deferred will crystallise as this replacement asset ceases to be your active asset. As previously determined in the ruling issued to you, you will satisfy the basic conditions for small business relief, accordingly you can access further rollover relief under division 152E of the ITAA 1997 provided you meet the relevant requirements when the replacement period ends. Further as we have already ruled that you meet the requirements for the small business retirement exemption in relation to the sale of the replacement asset and the subsequent CGT event A1, you will also be able to access the retirement exemption in relation to the J2 event and subsequent gain that crystallises on the disposal of the replacement asset, to the extent that you have not exceeded your lifetime limit.