Private ruling: Application of small business capital gains tax concessions
Published: June 2013
Ruling period: 1 July 2011 to 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are the conditions for the small business capital gains tax (CGT) 15-year exemption under subdivision 152B of the Income Tax Assessment Act 1997 (ITAA 1997) satisfied relating to the disposal of your property in 2012? | A1: Yes | Q2: Are the conditions for the small business CGT 50% active asset capital gains tax reduction available under subdivision 152C of the ITAA 1997 satisfied relating to the disposal of your property in 2012? | A2: No | Q3: Are the conditions for the small business CGT retirement exemption met under subdivision 152D of the ITAA 1997 satisfied relating to the disposal of your property in 2012? | A3: No

Relevant facts and circumstances: 1. As at 1 July 2011 you were over 55. 2. You purchased: · Property 1 in 1986, and · Property 2 in 1994. 3. The Property 1 and Property 2 are adjacent to each other. 4. The building on the Property 1 was used in the business of Trading Company from the date the company was registered in 1987 till the property was sold in 2012. 5. When purchased in 1994 the Property 2 was vacant land, a building was completed in 1996 and from that time: · the ground floor was used by in the business of Trading Company as a showroom until the building was sold, · the first level comprised parking, driveway and commercial waste storage; some of the car spaces on this level were used by the residents of upstairs apartments, · levels two and three comprised residential apartments which were rented out to third party tenants, and · the residential portion of the property, including resident car parking space, occupied approximately 37% of the total useable floor space of the building. 6. You entered into a contract for the sale of both Property 1 and Property 2 in June 2012. The sale was completed in August 2012. 7. The net value of the CGT Assets owned by you, just prior to the sale of Property 1 and Property 2 in June 2012, exceeded $6,000,000. 8. For the 2010, 2011 & 2012 income years you: · did not operate a business in your own capacity, and · your assessable income consisted primarily of interest, dividends and rent received from various investments. 9. You own 50% of the ordinary shares of Trading Company which carried 50% of the voting rights of the members of the company. 10. Trading Company: · was established by you and your late father, · was registered as a company in NSW in June 1987, and · has operated a business since it was registered as a company in 1987. 11. The ordinary income of Trading Company from carrying on its business activities: · was less than $2 million for the 2011 income year, · is estimated to be less than $2 million in the 2012 income year. 12. You have not taken any wages from Trading Company since before 2009 and you commenced your pension on the date you ceased to take wages. 13. You planned to retire from about the time options to sell Property 1 and Property 2 was granted in the 2012 financial year. 14. You ceased activities in Trading Company by the time the Property 1 and the Property 2 were vacated in August 2012. 15. Prior to ceasing activities you worked a 35-40 hour week with Trading Company. 16. Due to your age you are no longer physically capable of running a business. 17. Since ceasing with Trading Company the business has been run by your spouse. 18. The Property 1 and the Property 2 were old and problematic they were not generating any income for retirement as the main occupant, Trading Company, was trading at a loss. 19. You own 60% of the shares of the trustee of the Trading Company superannuation fund. 20. You also hold shareholdings in other companies (Other Shareholdings). 21. Your Other Shareholdings: · do not entitle you to more than a 40% interest in any distribution of income or capital from those companies, and · do not entitle you to more than a 40% interest in the voting power of those companies. 22. In 2009 Trading Company received more than 40% of the income distributed by your Family Trust. 23. Your Family Trust receives its income from investments in the form of rent, interest and dividends. 24. Your Family Trust is not involved in the operation of any business activities. 25. Your spouse and any children under 18 do not have or operate a business in their own right. 26. The redeemable preference shares issued by Trading Company do not have any voting rights.

Relevant legislative provisions: Income Tax Assessment Act 1997 , section 104-10 | Income Tax Assessment Act 1997 , Division 152 | Income Tax Assessment Act 1997 , section 152-10 | Income Tax Assessment Act 1997 , section 152-15 | Income Tax Assessment Act 1997 , section 152-35 | Income Tax Assessment Act 1997 , section 152-40 | Income Tax Assessment Act 1997 , section 152-47 | Income Tax Assessment Act 1997 , section 152-48 | Income Tax Assessment Act 1997 , section 152-105 | Income Tax Assessment Act 1997 , section 152-215 | Income Tax Assessment Act 1997 , section 152-330 | Income Tax Assessment Act 1997 , section 328-110 | Income Tax Assessment Act 1997 , section 328-125 | Income Tax Assessment Act 1997 , section 328-120

Reasons for decision: Detailed Reasoning - Basic Conditions: You satisfy the basic conditions to access the small business capital gains tax (CGT) concessions because: · you are connected with Trading Company Pty Ltd which in the 2012 financial year was a small business entity, and · your Property 1 and Property 2, which was mainly used by Trading Company in its business activities, is an active asset. | Detailed Reasoning - 15-Year exemption: You can access the 15-Year exemption contained in Subdivision 152B of the ITAA 1997 because you have held the Property 1 and Property 2 for more than 15 years and during this time the properties were used by Trading Company, an entity connected with you, in their business activities. | Detailed Reasoning - 50% Active asset reduction: Because your capital gain is disregarded under the 15-Year exemption you are not entitled to any further reduction under the 50% active asset reduction contained in subdivision 152C of the ITAA 1997. | Detailed Reasoning - Small business retirement exemption: Because your capital gain is disregarded under the 15-Year exemption you are not entitled to any further reduction under the small business retirement exemption contained in subdivision 152D of the ITAA 1997. | Detailed Reasoning - Basic conditions for small business CGT relief: To qualify for any of the small business CGT concessions the basic conditions contained in section 152-10 of the ITAA 1997, which are common to all the concessions, must be satisfied. Subsection 152-10(1) of the ITAA 1997 states that: A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain: (a) a CGT event happened in relation to a CGT asset of yours in an income year; (b) the event would (apart from this Division) 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 (see section 152-15); (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; (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; (a) the CGT asset satisfies the active asset test. The basic conditions, as they apply to your circumstances, will now be considered. | Detailed Reasoning - CGT Event that would have resulted in a gain: According to section 104-10 of the ITAA 1997 CGT event A1 happens when you enter into a contract for the disposal of a CGT asset. In June 2012 you entered into a contract for the disposal of the Property 1 and the Property 2 both owned by you. This disposal means CGT event A1 happened in June 2012 and, apart from Division 152 of the ITAA 1997, amounts to a capital gain. | Detailed Reasoning - Small business entity: You will be a small business entity (in accordance with section 328-110 of the ITAA 1997) if you are an individual, partnership, company or trust that: · is carrying on a business, and · has an aggregated turnover of less than $2 million. Based on the information you have provided you were not carrying on a business, in your own capacity, in either 2011 or 2012. As such you are not, in your own capacity, a small business entity. | Detailed Reasoning - Maximum net asset value test: You satisfy the maximum net asset value test set out in section 152-15 of the ITAA 1997 if the total net value of CGT assets owned by you, any entities connected with you and any affiliates (and entities connected with your affiliates), is less than $6 million, just before the CGT event you wish to disregard occurred. You have told us that the total net value of your CGT assets just prior to the disposal of the Property 1 and the Property 2 exceeds $6 million which means you do not satisfy the maximum net asset value test. | Detailed Reasoning - Passively-held assets (ss 152-10(1A) of the ITAA 1997): The conditions in ss 152-10(1A) of the ITAA 1997 allows access to small business CGT concessions for a CGT asset you own if: · you do not carry on a business in the income year other than in partnership, · you carry on a business in partnership, the CGT asset is not an interest in an asset of the partnership, · your affiliate, or an entity connected with you, is a small business entity for the income year in which the CGT event happens to your asset, and · your affiliate or entity that is connected with you at a time in the income year is the same small business entity that carries on the business and uses the asset at that time. | Detailed Reasoning - You do not carry on a business in the income year other than in partnership: When you disposed of Property 1 and Property 2 in 2012 you did not carry on a business (in your own capacity) and you were not part of a partnership. Your affiliate, or an entity connected with you is a small business entity for the income year in which the CGT event happens to your asset Connected with is defined in section 328-125 of the ITAA 1997; in the case of a company, ss 328-125(2) specifies that: An entity (the first entity ) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: …. (b) …. beneficially own, or have the right to acquire the beneficial ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company. In 2012 you owned 50% of the ordinary shares of Trading Company which carried 50% of the voting rights this means that you are connected with Trading Company in 2012. Trading Company will be a small business entity if it is carrying on a business and has an aggregated turnover of less than $2 million. In 2011 and 2012, Trading Company were in business. Aggregate turnover takes its meaning from section 328-115 of the ITAA 1997 as: · your annual turnover, · the annual turnover of any entities connected with you, and · the annual turnover of your affiliates. Annual turnover is defined in ss 328-120(1) of the ITAA 1997 as: · … the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business. When calculating your aggregate turnover, you do not include income from: · dealings between you and connected entities or affiliates, · dealings between any of your connected entities or affiliates, or · any connected entities or affiliates before (or after) they became a connected entity or affiliate. The relevant years for determining aggregate turnover are: · your previous years aggregated turnover (ss 328-110 (1)(b)(i) of the ITAA 1997), · an estimate of your current year aggregated turnover (ss 328-110 (1)(b)(ii) of the ITAA 1997), or · Your actual current year aggregate turnover (ss 328-110(4) of the ITAA 1997). In your case: § as the CGT event occurred in 2012, the relevant years for determining aggregated turnover are 2011 and 2012, and § the relevant test entity is Trading Company as it was carrying on the business. Analysis of the affairs of Trading Company demonstrates that: § Trading Company had ordinary income in 2011 from its business activities of less than $2 million and estimated ordinary income from business activities of less than $2 million in 2012. These amounts satisfy the definition of annual turnover contained in ss 328-120(1) of the ITAA 1997 and as such are included in the aggregate turnover of Trading Company for the relevant years. § As a connected entity your annual turnover is included in the aggregate turnover of Trading Company. As you are not undertaking any business activities (in your own capacity) your annual turnover is nil. § There is a special rule in section 152-48 of the ITAA 1997 for calculating aggregated turnover where the basic condition for passively-held assets applies. In your case this rule will deem any of your affiliates or entities connected with you as affiliates of or connected entities to Trading Company for the purposes of the application of ss 152-10(1A) of the ITAA 1997: · You hold a controlling interest in the trustee of the Trading Company Superannuation Fund, however as a superannuation fund is prevented by law from undertaking business activities (it also is unlikely that you would be connected with or an affiliate of the Trading Company Superannuation Fund), its annual turnover would be nil. · While you hold shares in various other companies, your holdings do not result in you controlling more than 40% of the voting rights or entitlement to 40% of the Income or capital distributions from these companies, which means these companies are not connected with you, so you do not need to consider their annual turnover in your aggregate turnover (There is nothing to demonstrate that the other shareholders of these companies are your affiliates). · There is also a special affiliate rule contained in section 152-47 of the ITAA 1997 applicable to ss 152-10(1A) of the ITAA 1997. This special rule acts to deem your spouse and your children under 18 as affiliates for the application of ss 152-10(1A). There is nothing to indicate that your spouse or children under 18 are carrying on a business in 2011 or 2012 so their annual turnover is nil. § Application of the rules in ss 328-125(4) of the ITAA 1997, relating to the control of a discretionary trust, mean that because of a distribution by your family trust in 2009 (more than 40% of the income distribution), Trading Company controlled your family trust in 2012. However as your family trust is not operating a business, its annual turnover is nil. This means that Trading Company, an entity connected with you, is a small business entity in 2012 because it was carrying on a business and its aggregate turnover is less than $2 million. Your affiliate or entity that is connected with you at a time in the income year is the same small business entity that carries on the business and uses the asset at that time In the 2011 and 2012 years Trading Company, which is connected to you, was operating a business from your Property 1 and Property 2 which is the CGT asset to which CGT event A1 happened. Summary passively-held assets (ss 152-10(1A) of the ITAA 1997) You satisfy the conditions in ss 152-10(1A) of the ITAA 1997 because: · you were not carrying on a business, in your own capacity, in the income year, · you were not carrying on a business in partnership, · a connected entity, Trading Company, is a small business entity for the 2012 income year, and · in the 2012 income year, Trading Company, was using your CGT asset, the Property 1 and the Property 2 in their business. | Detailed Reasoning - The asset meets the active asset: The active asset test is contained in section 152-35 of the ITAA 1997; the active asset test will be 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 (see 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 7.5 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). The meaning of the term active asset is found in sec 152-40 of the ITAA 1997. Essentially a tangible 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 another entity connected with you. Of relevance ss 152-40(4)(e) operates to exclude an asset whose main use by you is to derive rent unless its main use for deriving rent was only temporary. Based on what you have told us: · The entire Property 1, which was owned by you, was used in the business carried on by Trading Company, an entity connected with you. · The ground floor of Property 2, which was also owned by you, was used by the business carried on by Trading Company, an entity connected with you. The upstairs portion of this building comprises residential apartments which were rented out. The residential apartments comprised approximately 37% of the usable portion of the building. It is accepted that the main use of this building was in the operation of Trading Company. It is accepted that both the Property 1 and the Property 2 were active assets. As you purchased the Property 1 in 1986 and Property 2 in 1994 you have held both properties for more than 15 years. As both properties are active assets and were used or held ready for use the entire time in the business of your connected entity Trading Company, it is accepted that Property 1 and the Property 2 pass the active asset test. | Detailed Reasoning - Summary Basic Conditions for small business CGT relief: In summary, you satisfy the basic conditions for small business CGT relief because: · CGT event A1 happened in relation to a CGT asset of yours in the 2012 income year, · this event apart from Division 152 of the ITAA 1997 would have resulted in a capital gain, · you satisfy the conditions mentioned in subsection 152-10(1A), of the ITAA 1997, and · your CGT asset, Property 1 and Property 2 pass the active asset test. | Detailed Reasoning - 15 Year exemption for individuals: An individual can entirely disregard a capital gain from a CGT event happening to a CGT asset they have owned for at least 15 years, under section 152-105 of the ITAA 1997, if: · the basic conditions contained in subdivision 152-A of the ITAA 1997 are met, · you have continuously owned the CGT asset for the 15-year period ending just before the CGT event happened, and · when the CGT event happened you were 55 years or older, and the event happened in connection with your retirement. | Detailed Reasoning - Basic Conditions for CGT relief: The previous section titled 'Basic conditions for small business CGT relief' explains that the basic conditions for the small business CGT concessions are satisfied in relation to Property 1 and Property 2. | Detailed Reasoning - Continuously owned the CGT asset for the 15-year period: To satisfy this condition you must have continuously owned the CGT asset for the 15-year period ending just before the CGT event. You acquired Property 1 in 1986 and Property 2 in 1994. By the time of the contract of sale for both properties in June 2012, you had held both properties for a continuous period of over 15 years. | Detailed Reasoning - Over 55 and in connection with your retirement: Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as retirement. The Advanced guide to capital gains tax concessions for small business 2011-12 (NAT 3359-06.2012) provides the following example: A small business operator and spouse are both pharmacists, are both over 55 years old and carry on business through two pharmacies. They sell one (and make a capital gain) and, accordingly, reduce their working hours from 60 hours a week each to 45 and 35 hours a week respectively. There has been some change to their present activities in terms of hours worked and location. But there has not been a significant reduction in the number of hours or a significant change in the nature of their activities and, therefore, there has been no 'retirement'. If, on the other hand, one spouse reduced their hours to nil (stopped working), there would be a significant reduction in the number of hours that spouse was engaged in the business activities. The sale would, therefore, be in connection with the retirement of that spouse. You were 55 years or older when you sold the Property 1 and Property 2 in 2012 when the CGT event happened. You have told us that: · you have taken no wages since before 2009 and commenced your pension on that date, · you planned to retire from about the time you granted an option to sell Property 1 and Property 2 in the 2012 financial year, · you ceased activities with Trading Company at the time Property 1 and Property 2 were vacated by Trading Company in August 2012, · prior to ceasing activities you worked a 35-40 hour week with Trading Company, · since you ceased activities with Trading Company your spouse has been running the business, and · you are no longer physically capable of running a business due to your age, · Property 1 and Property 2 were old and problematic; they were occupied by Trading Company which was not generating any income for retirement and sustaining a loss. It is accepted, based on your circumstances, outlined above, that the sale of Property 1 and Property 2 is in connection with your retirement. | Detailed Reasoning - Summary 15 Year exemption for individuals: You meet the conditions for the 15 year exemption for individuals and can disregard the capital gain from the CGT event that happened to your Property 1 and Property 2 because: · you satisfied the basic conditions in subdivision 152-A of the ITAA 1997, · you have continuously owned the properties for a 15-year period ending just before the CGT event happened, and · when the CGT event happened you were 55 years or older and the event happened in connection with your retirement. | Detailed Reasoning - Small business 50% reduction described in Subdivision 152-C of the ITAA 1997: To apply the small business 50% active asset reduction, in subdivision 152-C of the ITAA 1997, you only need to satisfy the basic conditions, there are no further requirements. While you meet the basic conditions as explained in the section titled 'Basic conditions for small business CGT relief', section 152-215 of the ITAA 1997 gives the 15-year exemption priority over the small business 50% active asset reduction. As you meet the requirements for the 15-year exemption for individuals, there is no need to apply the small business 50% active asset reduction as the full capital gain is disregarded under that concession. This means that the small business 50% active asset reduction cannot be used, by virtue of section 152-215, to further disregard or reduce your capital gain as it has already been reduced to nil by applying the 15-year exemption. | Detailed Reasoning - Small business retirement exemption described in Subdivision 152-D of the ITAA 1997: The small business retirement exemption, in subdivision 152-D of the ITAA 1997, allows a small business entity to disregard all or part of a capital gain if you satisfy certain conditions. Section 152-330 of the ITAA 1997 gives the 15-year exemption priority over the small business retirement exemption. As you meet the requirements for the 15-year exemption, there is no need to apply the small business retirement exemption as the full capital gain is disregarded under that concession. This means that the small business retirement exemption cannot be used, by virtue of section 152-330, to further disregard or reduce your capital gain as it has already been reduced to nil by applying the 15-year exemption. As the 15-year exemption applies further consideration of the conditions you need to satisfy in order to qualify for the small business retirement exemption is not necessary. | Detailed Reasoning - Does Part IVA or any other anti-avoidance provision apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA of the ITAA 1936 applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. We have not fully considered the application of Part IVA of the ITAA 1936. If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA of the ITAA 1936 may apply. For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part IVA general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax .