Private ruling: Capital gains tax concessions for small business
Published: April 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Do you satisfy the basic conditions necessary to be eligible for the capital gains tax (CGT) concessions for small business? | A1: No | Q2: Are you eligible to disregard any capital gain made on disposal of the property under the CGT retirement exemption concession for small business? | A2: No

Relevant facts and circumstances: You were a partner in a partnership that conducted a business. The partnership qualified as a small business entity, as the turnover for the business and any business entities connected with you was under the $2 million threshold. In the mid 2000's you purchased a commercial property not far from where you operated the business. Approximately 1/3 of the total land area of the property was used as storage for your business. The remainder was rented out to a non-related third party. The business ceased in the late 2000's. You sold the property in the relevant financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 152-305 | Income Tax Assessment Act 1997 Section 115-10 | Income Tax Assessment Act 1997 Section 115-25

Reasons for decision: Detailed Reasoning - Small business CGT concession eligibility and the active asset test: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (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. (a) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. 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. 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 beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of: if the other entity is a partnership - the net income of the partnership. 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. Importantly, subsection 152-40(4) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. In your case, based on the information provided, you meet conditions a), b), and c). Therefore it is necessary to now determine whether the property in question is considered an active asset. You have owned the asset (the property) for less than 7 years however it has only been used in the course of carrying on a business for less than 3 years. Any time that the land was rented to an unrelated third party is not taken into account, as assets whose main use is to derive rent cannot be active assets. Therefore, as the property has not been an active asset for at least half of your period of ownership, the property does not satisfy the active asset test. Accordingly, as the asset does not satisfy the active asset test, you do not satisfy the basic conditions necessary to be eligible for the CGT concessions for small business. | Detailed Reasoning - 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. If you are an individual who chooses the retirement exemption, you do not need to terminate any activity or cease business. This concession allows you to provide for your retirement. Subsection 152-305(1) of the ITAA 1997 explains that 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). In your case, you do not satisfy the basic conditions necessary to be eligible for the CGT small business concessions. Accordingly, you do not satisfy the necessary conditions to be eligible for the retirement exemption concession.