Private ruling: Capital gains tax
Published: July 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Do you satisfy the basic conditions for the small business capital gains tax (CGT) concessions in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to any capital gain made from the sale of the warehouse? | A1: Yes. | Q2: Do you satisfy the conditions for the retirement exemption in subsection 152-305(2) and section 152-325 of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: You and your spouse are partners in a partnership. You and your spouse purchased a warehouse. You and your spouse operated a business from the warehouse. After years of unsuccessful trading, you and your spouse were forced to close the business. You and your spouse were both over 55 years of age and retired at this point in time. Since this time you and your spouse have been receiving a pension. You and your spouse have no intention of returning to work. The property was transferred as a gift to a relative. The market value of the property exceeded the purchase price. The partnership was a small business entity in the income year that the business ceased. You and your spouse are winding up a business that you previously carried on in partnership. Apart from the main residence which you currently reside in, you and your spouse do not own any other property. You and your spouse have not previously accessed the retirement exemption. The property was used in the business during the year it ceased.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-10(1), | Income Tax Assessment Act 1997 section 152-35, | Income Tax Assessment Act 1997 section 152-49, | Income Tax Assessment Act 1997 section 152-305(2), | Income Tax Assessment Act 1997 section 152-325, and | Income Tax Assessment Act 1997 Subdivision 152-D.

Reasons for decision: Detailed Reasoning - Question 1:: According to the Advanced guide to capital gains tax concessions for small business 2010-11 , to access the small business CGT concessions, you must satisfy several conditions that are common to all concessions. These are called the basic conditions in subsection 152-10(1). The small business 50% active asset reduction applies automatically if the basic conditions are satisfied. The basic conditions require the entity to satisfy the maximum net asset value test or be considered a small business entity for the income year. To be a small business entity you, your affiliates and connected entities must have an aggregated turnover of less than $2 million for the income year. | Detailed Reasoning - Businesses that are winding up: If an entity is not using the CGT asset in the business in the year of the CGT event (because they are winding up a business previously carried on) there is a special rule that applies. The rule allows the entity to be taken to still be carrying on a business in the year of the CGT event. It will only apply if they were a small business entity in the income year that the business ceased trading and if the CGT asset was used in the business during the year it ceased trading. | Detailed Reasoning - Active asset test: The basic conditions also include the active asset test. To meet this test, a CGT asset must be an active asset for either, 7.5 years if you have owned it for more than 15 years or half of the test period if you have owed it for 15 years or less. The test period begins when you acquire the asset and ends at the earlier of the time of the CGT event, or when the business ceases. In this case, the business operated by the partnership ceased. The partnership was considered a small business entity in this year. The partnership was winding up a business previously carried, and used the warehouse in the business the year it ceased trading. Therefore, the partnership is taken to be carrying on a business in the year of the CGT event for the purpose of the small business concessions. The warehouse is an active asset, as it was used in the course of carrying on a business for more than half of the ownership period. The basic conditions for the small business concession are satisfied; therefore the 50% active asset reduction can be applied to the capital gain made from the sale of the warehouse. | Detailed Reasoning - Question 2:: The small business retirement exemption (subdivision 152-D of the ITAA 1997) provides that if you are over 55 year of age and the basic conditions for relief are met, you can choose to disregard all or part of the gain up to the CGT retirement exemption limit (currently $500,000). The CGT exempt amount must be specified in writing. It is not essential to receive actual capital proceeds from the CGT event to be able to choose the retirement exemption. The retirement exemption is available where the market value substitution rule has applied to the sale of an asset. The market value substitution rule applies if you receive nothing in exchange for a CGT asset, for example if you give the asset away as a gift. You are taken to have received the market value of the asset at the time of the CGT event. In this case, the warehouse was gifted to a relative. Therefore, you and your spouse are taken to have received the market value of the asset at the time of the CGT event. This does not preclude you from accessing the retirement exemption As discussed in question one, the basic conditions for the small business CGT concessions have been satisfied. You and your spouse are over 55 years of age, and have not exceeded the retirement exemption limit. Therefore, you and your spouse may choose to apply the retirement exemption to the capital gain made from the sale of the warehouse.

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