Private ruling: Capital gains tax small business concessions
Published: February 2013
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will you make a capital gain on the disposal of the land if the proceeds received from the disposal are more than the cost base of the land? | A1:  | Q2: Do you satisfy the basic conditions necessary to be eligible for the capital gains tax (CGT) concessions for small business? | A2:  | Q3: Are you eligible to disregard any capital gain made on disposal of the land under the CGT 15-year exemption concession for small business? | A3:  | Q4: Are you eligible for the 50% CGT discount on any capital gain made on disposal of the land? | A4: 

Relevant facts and circumstances: The Trust purchased land in the early 90's. The trust carried on a business from the early 90's to the mid 90's. In the mid 90's, the land was cleared and then listed for lease with a local real estate agent. From this date onwards the land was either leased, or available for lease, and was no longer used by the trust in carrying on a business. You state that your aggregated turnover (and that of connected entities and affiliates) is less than $2 million. You state that you satisfy the maximum net asset value test limit of $6 million.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Subsection 152-10(1A) | Income Tax Assessment Act 1997 Subsection 152-10(1B) | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Subsection 152-40(4) | Income Tax Assessment Act 1997 Section 152-110 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 108-5(1) | Income Tax Assessment Act 1997 Section 104-10(4) | Income Tax Assessment Act 1997 Section 110-25 | Income Tax Assessment Act 1997 Section 110-35 | Income Tax Assessment Act 1997 Subsection 110-25(4) | Income Tax Assessment Act 1997 Subsection 110-25(5) | Income Tax Assessment Act 1997 Subsection 110-25(6) | Income Tax Assessment Act 1997 Section 115-10 | Income Tax Assessment Act 1997 Section 115-25

Reasons for decision: Detailed Reasoning - Small business CGT concession eligibility and the active asset test: 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 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 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. Section 152-35 of the ITAA 1997 explains that an asset will be an active asset if you have owned the asset for more than 15 years and it was an active asset for a total of at least 7 ½ years from the time when you acquired the asset until the CGT event. The period in which the asset is an active asset does not need to be continuous. Importantly, subsection 152-40(4) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. In your case, based on the information provided, you meet conditions a), b), and c). Therefore it is necessary to now determine whether the land in question is considered an active asset. You have owned the asset (the land) for over 15 years however, it was not used in the course of carrying on a business for at least 7 ½ years. For the majority of your ownership period, the land was either leased or available for lease. Therefore, the land does not satisfy the active asset test. Accordingly, as the asset does not satisfy the active asset test, you do not satisfy the basic conditions necessary to be eligible for the CGT concessions for small business. | Detailed Reasoning - 15-year exemption: Section 152-110 of the ITAA 1997 provides that a trust can disregard any capital gain made on the disposal of an asset 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 had a significant individual for a total of at least 15 years of the whole period of ownership (even if the 15 years was not continuous and it was not always the same significant individual), and (d) the individual who was a significant individual just before the CGT event was: · at least 55 years old at that time and the event happened in connection with their retirement, or · permanently incapacitated at that time. In your case, you do not satisfy the basic conditions necessary to be eligible for the CGT small business concessions. Accordingly, you do not satisfy the necessary conditions to be eligible for the 15-year exemption concession. | Detailed Reasoning - Cost base of a CGT asset: Section 104-10 of the ITAA 1997 explains that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change in ownership occurs from you to another entity. The time of the event is when you enter into the contract for the disposal or, if there is no contract - when the change of ownership occurs. Subsection 108-5(1) of the ITAA 1997 provides that a CGT asset is any kind of property, or a legal or equitable right that is not property. Subsection 104-10(4) of the ITAA 1997 provides that you make a capital gain from the disposal of an asset if the amount of money you received on the disposal was more than the cost base of the asset. Section 110-25 of the ITAA 1997 provides that there are five elements of the cost base; 1. money paid, or market value of property given, to acquire the asset 2. incidental costs of acquiring the asset, or that relate to the CGT event that happens to the asset 3. certain non-capital costs of ownership 4. capital expenditure on improvements 5. capital expenditure in respect of title or right to the asset Section 110-35 of the ITAA 1997 details the incidental costs of the second element which includes; 1) remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser. 2) costs of transfer 3) stamp duty or other similar duty 4) if you; a. acquired a CGT asset - costs of advertising or marketing to find a seller, or b. if a CGT event happened - costs of advertising or marketing to find a buyer 5) costs relating to the making of any valuation or apportionment for the purposes of this part 6) search fees relating to a CGT asset 7) cost of a conveyancing kit (or a similar cost) 8) borrowing expenses (such as loan application fees and mortgage discharge fees) 9) termination or other similar fees incurred as a direct result of your ownership of a CGT asset ending. You do not include costs if you: · have claimed a tax deduction for them in any year, or · omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired. Subsection 110-25(4) of the ITAA 1997 provides that the third element is the costs of owning the CGT asset you incurred (but only if you acquired the asset after 20 August 1991). These costs include: a) interest on money you borrowed to acquire the asset; and b) costs of maintaining, repairing or insuring it; and c) rates or land tax, if the asset is land; and d) interest on money you borrowed to refinance the money you borrowed to acquire the asset; and e) interest on money you borrowed to finance the capital expenditure you incurred to increase the asset's value. You do not include costs if you: · have claimed a tax deduction for them in any year, or · omitted to claim a deduction but can still claim it because the period for amending the relevant income tax assessment has not expired. Subsection 110-25(5) of the ITAA 1997 provides that the fourth element is capital expenditure you incurred: a) the purpose or the expected effect of which is to increase or preserve the asset's value; or b) that relates to installing or moving the asset. Subsection 110-25(6) of the ITAA 1997 explains that the fifth element is capital expenditure that you incurred to establish, preserve or defend your title to the asset, or a right over the asset. | Detailed Reasoning - 50% CGT discount: Section 115-10 of the ITAA 1997 provides that a discount capital gain can be made by a trust. A 50% discount may be applied to a discount capital gain realised by a trust where the asset that gave rise to the capital gain has been owned for a period of at least 12 months prior to the CGT event (section 115-25 of the ITAA 1997). In your case, the trust has held the asset for longer than 12 months, accordingly, you are entitled to apply the 50% discount to the capital gain made on the sale of the property.

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