Private ruling: Capital gains tax – small business relief
Date of advice: 13 March 2018
Published: June 2018
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Questions and Answers | 1. Does the unit meet the active asset test in section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)? | 2. Yes | 3. Are you entitled to the Capital Gains Retirement Exemption? | Yes

Relevant facts and circumstances: You operate a business as a sole trader under two business names. You purchased a unit in the 1990s in joint names with your spouse and the premises were advertised for sale at the time as an office. The unit is a one bedroom strata unit zoned residential. You have almost exclusively used the entire premises for business use including as an office for your businesses and for short stay accommodation when attending business meetings. It has been used this way for the whole period of ownership. You have not rented the premises to any external parties. There were some minor occasions of using the premises for private use. You have a residence and another office in your home city. Your annual turnover for both businesses is about $80,000 per annum. You are over 55 years old. You will not exceed your CGT retirement exemption limit with the amount of the capital gain that will be regarded. The CGT event will not happen in connection with your retirement nor were you permanently incapacitated at the time of the CGT event.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-10(1A) or (1B) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 subsection 152-40(4A) | Income Tax Assessment Act 1997 subsection 152-315(5) | Income Tax Assessment Act 1997 subsection 152-325(1) | Income Tax Assessment Act 1997 subsections 152-325(9) | Income Tax Assessment Act 1997 subsections 152-325(10) | Income Tax Assessment Act 1997 section 328-130 | Income Tax Assessment Act 1997 section 328-130(2)

Reasons for decision: Summary: 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 capital gains tax (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 (MNAV) 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. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Small business entity You are a small business entity for an income year (the current year) if: (a) you carry on a business in the current year; and (b) one or both of the following applies: (i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million; (ii) your aggregated turnover for the current year is likely to be less than $10 million. It is accepted that you are a small business entity. Active asset test Section 152-35 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 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 at least 7 ½ years during the test period. 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). As you have owned the property since 1994 it must be an active asset for a total of at least 7 ½ years during this period. Active asset 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. It is accepted that for the majority of the period since 1994 the property has been used or held ready for use in the course of carrying on your business. Retirement exemption The requirements for the small business retirement exemption are contained in Subdivision 152-D of the ITAA 1997. The conditions for this taxpayer to be able to choose the exemption are contained in subsection 152-305 of the ITAA 1997 and are as follows: (a) the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain (b) if the taxpayer is under 55 just before making the choice – an amount equal to the asset’s CGT exempt amount is contributed to a complying superannuation fund or an RSA and (c) the contribution is made at the later of when the choice is made and when the proceeds are received. The taxpayer must specify the amount in writing that he wishes to disregard (subsection 152-315(4) of the ITAA 1997), and not have exceeded the CGT retirement exemption limit. Subsection 152-320(1) of the ITAA 1997 states that an individual’s CGT retirement exemption limit is $500,000. The small business retirement exemption in Subdivision 152-D of the ITAA 1997 does not apply, however, to a capital gain to which Subdivision 152-B (15-year exemption) applies (subsection 152-330 of the ITAA 1997). 15-year exemption If you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied: (a) the basic conditions in Subdivision 152-A are satisfied for the gain; (b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event; (c) if the CGT asset is a share in a company or an interest in a trust - the company or trust had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset; (d) 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. As the CGT event has not happened in connection with your retirement nor were you permanently incapacitated at the time of the CGT event, you are not entitled to the 15-year exemption. As the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied and you will not exceed the CGT retirement exemption limit, you are entitled to the Capital Gains Retirement Exemption.