Private ruling: CGT – small business concessions – retirement and active asset
Date of advice: 5 November 2018
Published: January 2019
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the 50% interest in the property you acquired more than 15 years ago (interest 1) satisfy the active asset test for the purpose of the small business capital gains tax (CGT) concessions? | A1: Yes | Q2: Does the 50% interest in the property you acquired less than 15 years ago (interest 2) satisfy the active asset test for the purpose of the small business CGT concessions? | A2: No | Q3: Are you eligible to apply the CGT small business retirement exemption under Subdivision 152D of the Income Tax Assessment Act 1997 (ITAA 1997) upon the disposal of property interest 1? | A3: Yes | Q4: Are you eligible to apply the CGT small business retirement exemption under Subdivision 152D of the ITAA 1997 upon the disposal of property interest 2? | A4: No

Relevant facts and circumstances: You and your spouse acquired a property after 20 September 1985. At that time you acquired a 50% interest in the property (property interest 1). The property consists of a retail shop on the ground floor and living accommodation above the shop. You and your spouse carried on a business in partnership. You were an active partner in the business and undertook various activities running the business. The property was first used in the business from mth/20XX. You and your spouse live in the accommodation above the shop for some periods through the year; however this property is not your main residence. You acquired your spouse’s 50% interest (property interest 2) in the property upon their death on XX/mth/20XX. You continued to run the business after your spouse’s death. You formed a company (the company) on XX/mth/20XX, which commenced operating the business from that time. You held 100% of the shares in the company. The company paid you rent for the use of the property in the business. You sold the business to an unrelated party on XX/mth/20XX. You entered into a lease agreement for the property with the new owners of the business which is still in place. You deregistered the company on XX/mth/20XX. You intend to sell the property in the 20XX-XX income year. You are over 55 years of age and you have not retired. You satisfy the maximum net asset value test.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 Subdivision 152-D

Reasons for decision: Detailed Reasoning - Differing ownership interests in the property: The property will be considered two separate CGT assets. One being your original ownership interest (property interest 1) and the other being the ownership interest acquired from your deceased spouse (property interest 2). You are taken to have acquired your spouse’s ownership interest in the property on the date of their death. | Detailed Reasoning - Active asset test: Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership, 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 and a half years. 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. | Detailed Reasoning - Property interest 1: You have held property interest 1 for more than 15 years and it was an active asset of yours for more than 7 and a half years, therefore property interest 1 will satisfy the active asset test. | Detailed Reasoning - Property interest 2: You have held property interest 2 since XX/mth/20XX. Property interest 2 was an active asset of yours from acquisition to XX/mth/20XX. Property interest 2 was an active asset for less than half of your ownership period of to date. You intend to dispose of the property in this financial year, there is a lease agreement in place with the new business owners and you have ceased business, it is unlikely that you will use the property as an active asset prior to its disposal. As property interest 2 has been held for less than 15 years and was an active asset of yours for less than half of the period of ownership, it does not satisfy the active asset test. | Detailed Reasoning - Basic conditions to apply the small business CGT concessions: Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business 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. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. To be eligible to apply the small business CGT concessions you must satisfy all four of the basic conditions above. | Detailed Reasoning - Small business retirement exemption: Subdivision 152-D of the ITAA 1997 contains the small business retirement exemption. You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. As 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 person contribution equal to the exempt amount to a complying superannuation fund or retirement savings account. There is no requirement to make this contribution if the individual was 55 years old or older. The amount of capital gain 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. | Detailed Reasoning - Property interest 1: The disposal of property interest 1 will trigger a CGT event which will result in a capital gain; you satisfy the maximum net asset value test and the active asset test, therefore satisfying the basic conditions. As long as you maintain a written record of the amount you choose to disregard, you will be eligible to apply the small business retirement exemption upon the disposal of property interest 1. As you are over 55 years old there is no requirement to make a contribution to a complying superannuation fund or retirement savings account. | Detailed Reasoning - Property interest 2: The disposal of property interest 2 will trigger a CGT event which will result in a capital gain; you meet the maximum net asset value test however the active asset test for property interest 2 has not been satisfied. As you have not satisfied the basic conditions, you will not be eligible to apply any of the small business CGT concessions to the disposal of property interest 2.