Private ruling: CGT small business concessions - 15-year exemption - CGT event H1
Date of advice: 9 September 2025
Published: 10 November 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to apply the small business 15-year exemption in section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain you made when the contract of sale for the Property was terminated and the prospective purchaser forfeited their deposit? | A1: Yes.

Relevant facts and circumstances: You are an Australian resident private company. Your sole shareholder and director since incorporation until present is Person A. Person A is over 55 years old. You acquired the Property in 20YY. You have operated a motel business from the Property since 20YY providing short-term accommodation to guests. The motel consists of XX rooms which are occupied by unrelated persons at the same time. The guests have a non-exclusive right to occupy their rooms for the duration of their stay. Person A was looking to retire and made the decision to sell the Property and the Business. On XXX 20YY you entered into a contract for the sale of both the Property and the Business. The total sale price was $X million. The purchaser paid a deposit of $X. The contract included a 12-month settlement period. The settlement was initially to occur on XX XX 20YY. The purchaser encountered problems and deeds of variation were entered into to provide the purchaser with additional time to complete settlement. The purchaser was unable to complete settlement. You issued a 'Notice of Termination of Land Sale Contract and Business Sale Contract' ('Notice') to the purchaser. The Notice confirmed that the contract was terminated. Upon termination the purchaser forfeited their deposit. You retained the deposit. You incurred legal costs in relation to the contracts and forfeiture of the deposit. You continued to operate the Business from the Property from the time the contract was executed until the contracts were terminated and have continued to operate the Business from the Property following the termination. Person A reduced their working hours and changed their role in the Business in 20YY. Person A's intention was to fully retire when the original contract of sale was signed and the Property and Business were sold. You have an aggregated turnover of less than $2 million in the year ended 30 June 20XX. The Property and Business will not sell within 2 years of the forfeiture date.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-150 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 152-110

Reasons for decision: Summary: Small business 15-year exemption for companies A company 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 of the ITAA 1997 are satisfied for the gain b) the company continuously owned the CGT asset for a period of 15-years ending just before the CGT event c) during the period of ownership, the company had at least one significant individual for a cumulative total of at least 15 years (this period need not be continuous, and the individual may change over the period), and d) just before the CGT event, a significant individual of the company was either aged 55 or over and the event occurred in connection with their retirement, or the individual was permanently incapacitated at the time of the event (section 152-110 of the ITAA 1997). Basic conditions The basic conditions in section 152-10 of the ITAA 1997 must be satisfied for an entity to be able to reduce or disregard its capital gains using the small business concessions. The basic conditions are: a) a CGT event happens in relation to a CGT asset of yours in an income year b) the event would have resulted in a gain c) at least one of the following applies: (i) you are a CGT small business entity for the income year (ii) you satisfy the maximum net asset value test (iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or (iv) you do not carry on a business, but your CGT asset is passively held and is used in a business carried on by a small business entity that is your affiliate, or an entity connected with you, and d) the CGT asset satisfies the active asset test. The relevant CGT event CGT event H1 happens when a deposit paid to you is forfeited because a prospective sale or other transaction does not proceed (section 104-150 of the ITAA 1997). The time of the event is when the deposit is forfeited (subsection 104-150(2) of the ITAA 1997). The Commissioner, faced with the Full Federal Court decision in FC of T v Guy 96 ATC 4520; (1996) 32 ATR 590 ( Guy ), took the view in Taxation Ruling TR 1999/19 Income tax capital gains: treatment of forfeited deposits (TR 1999/19) that a contract for the sale of real estate was not a 'prospective purchase or other transaction'. The effect of this was that TR 1999/19 expressed the opinion that section 104-150 of the ITAA 1997 (CGT event H1) did not apply to a deposit forfeited under an actual contract for the sale of real estate. The Ruling went on, however, to say that other capital gains provisions (in particular CGT event A1 in section 104-10 of the ITAA 1997 or CGT event C2 in section 104-25 of the ITAA 1997) applied to these forfeited deposits on the sale of post-CGT real estate (other than a main residence). The Commissioner's view in TR 1999/19 was affected by the decision of the Full Court of the Federal Court of Australia in Brooks v FC of T [2000] FCA 721; 2000 ATC 4362; (2000) 44 ATR 352 ( Brooks ) on 9 June 2000 and should be applied in light of that decision. Following the Brooks decision, the Commissioner released TR 1999/19A - Addendum - Income tax: capital gains: treatment of forfeited deposits which should be read as one with TR 1999/19. The Federal Court in the Brooks case decided that the decision in the Guy case was - in the words of the Court - 'plainly wrong' and 'should not be followed'. Accordingly, the main effect of the decision in the Brooks case on TR 1999/19 is that it clarifies that if the forfeiture of a deposit under a contract for the sale of real estate does not occur within a 'continuum of events' the forfeited deposit is assessable under CGT event H1. This alters the position taken in TR 1999/19 that the forfeited deposit would be assessable as a result of CGT event C2 happening. TR 1999/19 at paragraph 16 provides a 'continuum of events' refers to a linked sequence beginning with an earlier contract for sale, followed by the forfeiture of a deposit when that contract fails, and concluding with a genuine later sale of the same asset. To establish this continuum, there must be ongoing and reasonable efforts to resell the asset after the initial contract falls through, ultimately resulting in its disposal. This connection ensures the forfeited deposit is treated as part of the capital proceeds from the sale of the underlying asset, rather than as a separate gain from the ending of contractual rights. Paragraph 17 of TR 1999/19 explains that while there is no fixed timeframe for when a 'continuum of events' ceases, the longer the period between the forfeiture of the deposit and the subsequent disposal of the asset, the harder it becomes to establish that such a continuum exists. TR 1999/19 provides it is difficult to show a 'continuum of events' of more than 2 years from the date of forfeiture under the earlier contract. CGT small business entity An entity is a CGT small business entity for an income year if it carries on a business during that year and its aggregated turnover is less than $2 million. This can be established by either: having carried on a business in the previous year with an aggregated turnover below the threshold, or projecting that the aggregated turnover for the current year will remain under $2 million (subsection 152-10(1AA) of the ITAA 1997). CGT asset A CGT event must happen in relation to a CGT asset of yours in an income to satisfy paragraph 152-10(1)(a) of the ITAA 1997. In ATO Interpretive Decision 2003/346 (ATO ID 2003/346) the Commissioner considered the scenario where: • a taxpayer entered into a contract to sell land and the prospective purchaser paid the taxpayer a deposit. • the prospective purchaser did not proceed with the purchase of the land and forfeited their deposit, and • the taxpayer decided not to sell the land and took it off the market. As the land remained unsold the forfeiture of the deposit was therefore not part of a 'continuum of events' constituting the later disposal of the land, as that expression is used in TR 1999/19. Accordingly, CGT event H1 in section 104-150 of the ITAA 1997 happened. The words 'in relation to' in paragraph 152-10(1)(a) of the ITAA 1997 are considered wide enough to allow reference to an underlying asset such as land that was the subject of a sale which has fallen through. CGT event H1 happens in relation to the underlying land. Paragraph 152-10(1)(a) of the ITAA 1997 can therefore be satisfied for a capital gain made from CGT event H1. In terms of paragraph 152-10(1)(d) of the ITAA 1997 it is the underlying asset that must satisfy the active asset test. Active asset test The CGT asset must satisfy the active asset test in order to satisfy the basic conditions (section 152-35 of the ITAA 1997). The active asset test will be met if: • you have owned the CGT 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 from when you acquired it to the time of the CGT event or the cessation of the business; or • you have owned the CGT 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 period specified in section 152-35(2). A CGT asset is an active asset at a time if, at that time the asset is used, or held ready for use, in the course of carrying on a business that is carried on whether by your or your affiliate or another entity that is connected with you (subsection 152-40(1) of the ITAA 1997). Paragraph 152-40(e) of the ITAA 1997 excludes certain assets from being classified as active assets. Specifically, an asset is not an active asset if its main use it to derive rent, unless its main use for deriving rent was only temporary. Whether an assets main use is to derive rent will depend on the particular circumstances of each case. The term 'rent' has been described as referring to the payments made by a tenant or lessee to a landlord or lessor for exclusive possession of the leased premise (Taxation Determination TD 2006/78 income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? (TD 2006/78) at paragraph 22 ) . A key factor in determining whether an occupant of premises is a lessee paying rent is whether the occupier has a right to exclusive possession. Where premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent. Other relevant factors to consider in determining main use include the degree of control retained by the owner and the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities ( Allen v. Aller (1966) 1 NSWR 572), Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 and Marchant v. Charters [1977] 3 All ER 918). Relevantly, in example 4 of TD 2006/78, Linda operates a complex of six holiday apartments in a manner similar to a motel. Guests book short stays (typically 1 to 7 nights), do not have exclusive possession, and receive services such as cleaning, linen, and meals. No lease agreements are entered into. Because the arrangement lacks the characteristics of a landlord/tenant relationship, the income is not considered rent. Therefore, if Linda is carrying on a business, the apartments can qualify as active assets under section 152-40 of the ITAA 1997, and the rental exclusion in paragraph 152-40(4)(e) does not apply. Small business 15-year exemption additional conditions Significant individual An individual is a significant individual of a company if at that time, the individual has a small business participation percentage in the company of at least 20% (section 152-55 of the ITAA 1997). The small business participation percentage is the sum of the entity's direct and indirect percentage (section 152-65 of the ITAA 1997). An entity's direct small business participation percentage in a company is the percentage that the entity has because of holding the legal and equitable interests in shares in the company: Item 1 of the table in section 152-70(1) of the ITAA 1997 explains how to calculate a company's direct small business participation percentage. It states that an entity's percentage interest in a company is determined by either: • the percentage of voting power the entity holds in the company • the percentage of any dividends the company may pay to the entity • the percentage of any capital distributions the company may make to the entity If these percentages differ, the smallest one is used. In connection with retirement Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. A CGT event may be in connection with your retirement even if it occurs at some time before or after retirement. The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with retirement', nor does it give any indication of the degree of retirement required in order to take advantage of this concession. It could be argued that the phrase 'in connection with retirement' means that the capital gain arising from the disposal of active assets is to be used to provide funds for a person's retirement rather than to precipitate retirement at the time of the CGT event. The Commissioner's view is that it is not necessary for there to be a permanent and everlasting retirement from the workforce. However, there would need to be at least a significant reduction in the number of hours worked or a significant change in the nature of the activities to be regarded as a retirement for the purposes of paragraph 152-110(1)(d) of the ITAA 1997. The retirement does not need to occur immediately following the event, however whether a particular case satisfies the conditions depends very much on the facts of the case. | Detailed Reasoning - Application to your circumstances: In your case, the basic conditions contained in Subdivision 152-A of the ITAA 1997 are satisfied because: • CGT event H1 happened in relation to a CGT asset of yours (the Property and Business) when the purchaser forfeited the deposit under the contract of sale • the CGT event resulted in a gain • you were a CGT small business entity in the year ended 30 June 20XX • the Property and Business satisfy the active asset test as: o we consider that the guests who stay in the Property on a short-term basis are not entering into a lease arrangement that provides exclusive possession. As such, the character of the payments made by the guests for their stay are not considered a payment of rent and therefore the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 does not apply to prevent the property from being an active asset, and o you have owned them for more than 15 years and they have been an active asset of yours for a total of at least 7½ years. In addition, • you have continuously owned the Property and Business for the 15-year period ending just before the CGT event • Person A is your sole shareholder and has owned 100% of your shares since incorporation. Therefore, you have had a significant individual for a total of at least 15 years during which you have owned the Property and Business, and • Person A, a significant individual of yours just before the CGT event, was 55 or over at that time, and • the CGT event is considered to have happened in connection with Person A's retirement. As you satisfy all the requirements of section 152-110 of the ITAA 1997 you are entitled to apply the small business 15-year exemption to disregard the capital gain you made when the contract of sale was terminated and the prospective purchaser forfeited their deposit.