Private ruling: CGT Small business concessions - basic conditions – 15-year exemption
Date of advice: 25 July 2018
Published: September 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will you satisfy the basic conditions for the small business capital gains tax (CGT) concessions on the sale of your 50% interest in the property? | A1: Yes. | Q2: Will you be able to apply the small business 15-year exemption to disregard the capital gain that you make on the disposal of your 50% interest in the property? | A2: Yes.

Relevant facts and circumstances: The property was acquired by you and your spouse as joint tenants The property contains a two-storey building. You earn rental income from the property. A Trust (the Trust) leases the first floor of the building. The Trust has operated a business (the Business) on the first floor of the property since it was purchased. The Business commenced prior to purchasing the building. The Business has been operating continuously since before the property was acquired. A Company is the corporate trustee of the Trust. You and your spouse are the directors and equal shareholders of the Company. The Company acts in accordance with your directions and wishes. The second storey of the building is rented to a non-related party and has always been rented or available for rent since acquisition. The first floor makes up 60% of the total floor space, and the second floor makes up 40% of the total floor space. Since acquisition of the property, you have not used the building for any personal use. The Trust’s aggregated turnover for the 20XX-XX financial year was $X. The Trust’s aggregated turnover for the 20XX-XX and 20XX-XX financial years will be less than $2 million. Apart from the business income, the Trust does not derive any other income. You recently engaged in a real estate to undertake a marketing campaign for the property to seek expression of interests. You have been approached by an unrelated third party for the sale of the property. The estimated sale price is $X. Disposal of the property is expected to occur during the 20XX-XX financial year. You are both over the age of 55. The disposal of the property will take place as a move towards retirement. The Trust will dispose of the café business at a time that will coincide with the disposal of your interest in the property. While you may visit the business casually you will not be employed in the business in any formal capacity. Accordingly, the total time and effort commitment that you will provide to the business post-disposal will reduce significantly. You do not carry on any business in your personal capacity and do not have any plans to materially engage in business or employment in the foreseeable future.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 152-10(1) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 paragraph 152-40(4A) | Income Tax Assessment Act 1997 paragraph 152-105

Reasons for decision: Summary: Basic Conditions In order to access the small business concessions contained in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997), the basic conditions (in addition to any conditions relevant to each specific concession) must be satisfied. Subsection 152-10(1) of the ITAA 1997 states that a capital gain you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain: (a) a CGT event happens in relation to a CGT asset of yours in an income year; (b) the event would (apart from this Division) have resulted in the 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; (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; (d) the CGT asset satisfies the active asset test. Active Asset test The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if: (a) 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 (b) 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. 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 determining the main use of an asset for the purposes of paragraph 152-40(4)(e) of the ITAA 1997, any use of the asset by a connected entity is treated as your use of the asset (paragraph 152-40(4A)(b). Therefore, an asset leased to a connected entity for use in the connected entity's business will not, by that reason alone, be excluded by paragraph 152-40(4)(e) from being an active asset. Taxation Determination TD 2006/78 considers the active asset test and the main use to derive rent concept. Paragraph 26 of TD 2006/78 states that: If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact depended on all the circumstances as to whether the main use of the asset at that time is to derive rent. No on single factor will necessarily be determinative, and resolving the matter is likely to involve a consideration of a range of factors such as: ● the comparative areas of use of the premises (between deriving rent and other uses); and ● the comparative levels of income derived from the different uses of the asset. Example 5 considers mixed use of a property: Mick owns land on which there are a number of industrial sheds. He uses one she (45% of the land by area) to conduct a motor cycle repair business. He leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the motor cycle repair business is 80% of the total income (business plus rentals) derives from the use of the land and buildings. In determining if the main use of the land is to derive rent, it is appropriate to consider a range of factors. In this case, a substantial (although nevertheless not a majority) proportion by area of the land is used for business purposes. As well, the business proportion of the land derives the vast majority (80%) of the total income. In all the circumstances, the Tax Office considers the main use of the land in this case is not to derive rent and accordingly the land is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997. Small business 15-year exemption Section 152-105 of the ITAA 1997 provides a small business 15-year exemption for individuals. Under this section, you can disregard the capital gain made on the disposal of a CGT asset if you: (a) satisfy the basic conditions for the small business CGT concessions in Subdivision 152-A of the ITAA 1997 (b) continuously owned the CGT asset for the 15-year period ending just before the CGT event, and (c) are at least 55 years old at the time of the CGT event and the event happens in connection with your retirement, or are permanently incapacitated at that time. In connection with an individual’s retirement Whether a CGT event happens in connection with an individual’s retirement depends on the particular circumstances of each case. There needs 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 workforce. Application to your circumstances In your case, the basic conditions contained in Subdivision 152-A of the ITAA 1997 are satisfied because: ● CGT event A1 will happen when you dispose of the property ● the event will result in a gain ● an entity connected with you (the Trust) will be a CGT small business entity in the income year of the event ● you have owned your 50% interest in the property for more than 15 years and the property has been used in the business of the Trust for a total of at least 7½ years of your ownership period, and ● during the year ended 30 June 2019: ● you have not and will not carry on any business, and ● the Trust will use the property in its cafe business. In addition, ● you will have continuously owned your 50% interest in the property for the ● 15-year period ending just before the CGT event ● you will be at least 55 years old when you dispose of the property, and ● the disposal will happen in connection with your retirement. You qualify for the small business 15-year exemption in section 152-105 of the ITAA 1997 in relation to the property. You can disregard your share of the capital gain you make on its disposal.