Private ruling: CGT - Small business concessions
Date of advice: 26 June 2017
Published: October 2017
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to apply the 50% general discount to any capital gain arising from the sale of the property? | A1: Yes. | Q2: Are you entitled to apply the small business 50% active asset reduction to capital gain that results from the disposal of the property? | A2: Yes. | Q3: Are you eligible to disregard any remaining capital gain made on disposal/transfer of the property under the CGT retirement exemption concession for small business? | A3: Yes.

Relevant facts and circumstances: You are a shareholder in company. The company conducted business on a property that you own. You owned the property for less than 15 years. The company’s turnover has never exceeded $2million. You have sold the property. The property was used in the business for the entire ownership period. You are over 55 years old. You have not previously used the retirement exemption.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-35, | Income Tax Assessment Act 1997 Subsection 328-125(1), | Income Tax Assessment Act 1997 Subsection 328-125(2), | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e), | Income Tax Assessment Act 1997 Section 104-10 and | Income Tax Assessment Act 1997 Subdivision 152D.

Reasons for decision: Summary: Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to a CGT asset. The most common event, CGT event A1, happens if you dispose of a CGT asset to someone else e.g. the disposal of a dwelling. In this case, the disposal of the property constitutes CGT event A1. | Detailed Reasoning - CGT concessions: Individuals (including partners in partnerships) may be able to reduce any capital gain in the following sequence. First you offset capital losses against capital gains. Then you apply: ● the small business 15-year exemption if applicable ● the CGT discount ● the small business CGT concessions. | Detailed Reasoning - Discount capital gain: CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997), relating to the disposal of a CGT asset, will happen when you dispose of the property. You will make a capital gain if the capital proceeds from the disposal are more than the cost base. You will make a capital loss of those capital proceeds are less than the reduced cost. You will be eligible for the discount capital gains where: ● you are an individual ● the CGT event happened after 21 September 1999 ● the capital gain must be calculated without any reference to indexation of the cost base; and ● the CGT asset was acquired more than 12 months the CGT event. The discount percentage is 50%. Where a capital gain meets these requirements, that capital gain is a discount capital gain. Generally, the discount percentage is applied to the discount capital gain, to arrive at your net capital gain. As you purchased the property more than 12 months before the CGT event occurred and you satisfy the other conditions for a discount capital gain, you are eligible for the 50% CGT discount on the capital gain made from the sale of the property. | Detailed Reasoning - Small business CGT concessions: The basic conditions for the small business capital gains tax concessions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are: ● the small business entity test and ● the active asset test. Small business entity You will be a small business entity 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. In your case, the information provided is that business has a turnover of less than $2 million. Active asset test The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is 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 detailed 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 is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. A 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, your spouse or child, or an entity connected with you. Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if: a) either entity controls the other entity in a way described in this section; or b) both entities are controlled in a way described in this section by the same third entity. Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: if the other entity is a company - beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company. Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. In this case, you have owned the property for less than 15 years and it has been used in the course of carrying on a business of a company that you are a shareholder (holding more than 40%) in for at least half of your ownership period. Therefore, the property will satisfy the active asset test. Small business 50% reduction Unlike the other small business concessions, the small business 50% active asset reduction applies automatically if the basic conditions are satisfied, unless you choose for it not to apply. To apply the small business 50% active asset reduction, you need to satisfy only the basic conditions. There are no further requirements. In your case, you satisfy the basic conditions and you will be eligible for the small business 50% active asset reduction. Retirement exemption If you are an individual, you can choose to disregard all or part of a capital gain if: ● you satisfy the basic conditions ● you keep a written record of the amount you chose to disregard (the CGT exempt amount), and ● if you are under 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA). You must make the contribution: ● when you made the choice to use the retirement exemption, or when you received the proceeds (whichever is later), or ● when you made the choice to use the retirement exemption if the relevant event is CGT event J2, J5 or J6. If you are 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA. For an individual choosing the retirement exemption, there is no requirement to terminate any activity or cease their business. The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) must not exceed your CGT retirement exemption limit. An individual’s lifetime CGT retirement exemption limit is $500,000 reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. This includes amounts disregarded under former (repealed) retirement exemption provisions. In this case, as discussed above, you satisfy the basic conditions. Provided you keep a written record of the amount you chose to disregard, you are entitled to the small business retirement exemption. Therefore you will be able to choose to disregard up to $500,000 under the retirement exemption by simply keeping a record of the amount you chose to disregard.