Private ruling: CGT - small business 15-year exemption
Date of advice: 24 June 2021
Published: August 2021
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Do you satisfy the basic conditions under Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Are you entitled to the capital gains tax (CGT) small business 15-year exemption on the sale of your property? | A2: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 152 | Income Tax Assessment Act 1997 -Subdivision 152-A | Income Tax Assessment Act 1997 - Subdivision 152-B

Reasons for decision: Summary: The capital gains tax (CGT) provisions provide some small business relief in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Basic conditions: To qualify for the small business CGT concessions, the basic conditions as contained in subdivision 152-A of the ITAA 1997 must be satisfied. The basic conditions are: • A CGT event happens in relation to a CGT asset of yours in an income year, • The event would have resulted in a gain, • The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and • At least one of the following applies; - you are a small business entity for the income year, - you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, - you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or - you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you. You satisfy the maximum net asset value test. | Detailed Reasoning - Active asset test: A capital gains tax (CGT) asset will satisfy the active asset test if: (a) 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, or (b) 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 7½ years during the test period. Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you. Subsection 152-40(4) of the ITAA 1997 provides some exceptions and lists some assets that cannot be active assets. Paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset, unless that main use was only temporary. That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent. In your case, you have owned the property for more than 15 years and the property was an active asset for at least 7½ years. You satisfy the active asset test. It does not matter that the property was subsequently used to derive rent. You satisfy the basic conditions in subdivision 152-A of the ITAA 1997. | Detailed Reasoning - Small business 15-year exemption: Subdivision 152-B of the ITAA 1997 provides a small business 15-year exemption if certain conditions are met. Under section 152-105 of the ITAA 1997, 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, (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, and (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 set out above, you satisfy the basic conditions for the small business CGT concessions. You acquired your property more than 15 years ago and meet the condition in paragraph 152-105(b) of the ITAA 1997. You are both over 55 and the CGT event happens in connection with your retirement, therefore the condition in paragraph 152-105(d) of the ITAA 1997 is met. Therefore as you meet all the conditions necessary for the 15-year exemption to apply, you can disregard any capital gain made on the sale of your property. As the capital gain is entirely disregarded under subdivision 152-B of the ITAA 1997, you do not need to apply any other concessions. That is, the other concessions contained in Division 152 of the ITAA 1997 are not relevant in your circumstances.

Relevant facts: Entity A and entity B (you) jointly purchased a property several years ago for $xxxx plus costs and established a partnership. | The ownership period for this property is more than 15 years. | From xxxx to xxxx you operated a business from the property. You were both actively employed in this business. | The business (not the premises) was sold in xxxx and the new owners continued to operate from the same premises, paying commercial rent to you for approximately xx years. The new owners are not affiliates or a connected entity to you. | From xxxx to xxxx, you worked as casual employees but your primary income was generated from managing this property (without an agent) including maintaining financial books and records, negotiating and advising tenants of rental increases, calculations of outgoings applicable (including land tax), negotiating finance and overseeing repairs/negotiating pricing for repairs. | The partnership plus individual turnover did not exceed $X million in the relevant years. | The property is now being sold for $xxxx to these same business owners, that is, the existing tenants of the property. Exchange of contracts being effected on xxxx and having a settlement period of xx months, or earlier, at the purchaser's discretion. The property has not settled yet. | The investment property you also owned was sold in the 20XX-XX income year, with settlement occurring on xxxx. | You or any entities connected with you or your affiliates do not own any other CGT assets. | You are both over 55 years and retiring from all active business.