Private ruling: Small business capital gains tax concessions
Date of advice: 3 February 2016
Published: March 2016
Ruling period: Year ended 30 June 20WW
Date scheme commenced: 1 July 20VV

Ruling: Q1: Are you eligible to apply the small business capital gains tax (CGT) 15 year exemption concession to the gain from the sale of the Land? | A1: Yes.

Relevant facts and circumstances: You purchased a property. Company X used half of the property to operate a business ('the Land'). You were an employee of Company X. You were the sole director and shareholder of Company X. Company X is a small business entity for tax purposes. You entered into a contract to sell the property and the business during the 20VV-WW financial year. You had owned the property for more than 15 years. A condition of the sale of the business was that you assist the new owners for one day per week for a number of months to ensure a smooth transition. Other than this 'work' you are not working and have retired. You were aged 55 years or over at the time you entered into the sale contract.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-105 | Income Tax Assessment Act 1997 Section 328-15

Reasons for decision: Summary: To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. The basic condition for the small business CGT concessions in subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) (as relevant to this case) is the active asset test. A CGT asset will satisfy the active asset test if: • you have owned the asset for 15 year or less and the asset was an active asset of yours for a total of at least half of the test period, 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 7½ years during the test period. The test period begins when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased be carried on in the 12 months before that time - the cessation of the business. 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 connected with you. An entity is connected with another entity if either entity controls the other entity, or both entities are controlled by a third entity. Under subsection 328-15(2) of the ITAA 1997 an entity controls a company if it: • beneficially owns interest in the other entity that gives the right to receive at least 40% of any distribution of income or capital by the other entity, or • beneficially owns equity interests in the company that give at least 40% of the voting power in the company. In this case, as you own 100% of the shares in Company X, you are connected to the company for the purposes of this legislation. Company X has used the Land in carrying on their business activities for the full time you have owned the Land, a period of over 15 years. Therefore, the Land satisfies the active asset test. | Detailed Reasoning - Small business 15 year exemption concession: An individual can disregard a capital gain from a CGT event happening to a CGT asset they have owned for at least 15 years if they: • satisfy the basic conditions for the small business CGT concessions • continuously owned the CGT asset for the 15 year period ending before the CGT event happened, and • when the CGT event happened: • they were permanently incapacitated, or • they were 55 years or older and the event happened in connection with their retirement. In this case, the basic conditions have been met and the Land was owned for more than 15 years prior to the CGT event happening. 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 a retirement. However it is not necessary for there to be a permanent and everlasting retirement from the workplace. The following example provides a guide as to the likely scope of the term. A small business operator, over 55 years old, sells his business. Under the terms of the sale, he agrees to be employed by the new owner for a few hours each week for two years. The sale of the business would be in connection with the small business operator's retirement. He has permanently or indefinitely ceased being self-employed and has commenced gainful employment on a much reduced scale with another party, although still performing similar activities. Your case is similar to the example above. You are aged over 55 years and the Land on which the business activities were carried out has been sold. You have ceased your employment but have continued to assist the new owners once a week for some months. It is considered that the CGT even has happened in connection with your retirement. As the basic conditions have been met, you owned Land for more than 15 years and the CGT event happened in connection with your retirement, you are entitled to apply the small business 15 year exemption concession to the gain resulting from the sale of the Land.