Private ruling: 15 year exemption
Published: November 2014
Ruling period: Income year ended 30 June 2014 | Income year ended 30 June 2015 | Income year ended 30 June 2016 | Income year ended 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the property be an active asset under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Are you eligible to disregard any remaining capital gain made on disposal/transfer of the share of the property you acquired on x under the CGT small business 15 year exemption? | A2: Yes | Q3: Are you eligible to disregard any remaining capital gain made on disposal/transfer of the share of the property you inherited under the CGT small business 15 year exemption if that disposal/transfer occurs before x? | A3: Yes

Relevant facts and circumstances: You carried on a business initially in a partnership. You are the sole shareholder and director of the company. You transferred that business to a company in xxxx. You purchased a xx hectare property in xxxx. You constructed a factory on this property, which the company has used to carry on its business since it formed. You constructed a main residence, which you have lived in since. No portion of the land is used to derive rent. You are considering selling the property to a developer. Your total aggregate turnover is and will be under $2,000,000.00 You are over 55, and will retire upon selling the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 152-10(1A) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 152-105 | Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 section 328-130

Reasons for decision: Summary: 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 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. Subsection 152-10(1A) provides that you satisfy this subsection where you do not carry on business but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you and that entity is the relevant entity for the active asset test. Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when your ownership in a CGT asset (eg. land or buildings) is transferred to another entity. 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. However, subsection 152-40(4) explains that an asset whose main use is to derive rent cannot be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use. Subsection 328-130(1) of the ITAA 1997 provides that an entity is an affiliate of yours if that entity acts, or could reasonably be expected to act, in accordance with your direction or wishes, or in concert with you, in relation to the affairs of the business of the entity. 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. In your case: • you intend to sell the property to a developer which will constitute CGT event A1 and will result in a capital gain • as you are the sole director and shareholder of the company, it can reasonably be expected that the company will act in accordance with your directions or wishes and therefore it will be your affiliate. • the company (your affiliate) carries on a business on the property • you have owned your interest in the property for a period of over 15 years, during that period the property has been used in the business of your affiliate (the company) for a period greater than 7.5 years. Accordingly, you satisfy all the basic conditions necessary to be eligible for the CGT small business concessions. As you satisfy all the basic conditions, you automatically qualify for the 50% active asset reduction concession. | Detailed Reasoning - Small business 15-year exemption: The small business 15-year exemption takes priority over the other small business concessions and the CGT discount. If the small business 15-year exemption applies, you entirely disregard the capital gain so there is no need to apply any further concessions. Further, you do not reduce the capital gain by any capital losses before you apply the 15-year exemption concession. Subsection 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if all of the following conditions are satisfied: (a) you satisfy the basic conditions (b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event (c) you are either: i. 55 or over at the time of the CGT event and the event happens in connection with your retirement; or ii. permanently incapacitated at the time of the CGT event. In your case: • you satisfy the basic conditions • you have owned your share of the asset for over 15 years • you are aged over 55 • you will retire upon the sale of the property Accordingly, you satisfy all the conditions necessary to be eligible for the small business 15-year exemption concession in relation to the share of the property you initially acquired in 1987. | Detailed Reasoning - Small business concession and death: For CGT purposes, join tenants are treated as tenants in common having equal shares in assets. When one joint tenant dies, their interest in the asset is taken to have been acquired in equal shares by the surviving joint tenants on the date of death. Consequently regardless of whether title was held as joint tenants or tenants in common you are deemed to have acquired your deceased partner's share of the property on the date of their death. Consequently in relation to the share of the property you inherited you will not meet the continuous ownership requirement of subsection 152-105(b) of the ITAA 1997. However section 152-80 of the ITAA 1997 provides that if a person carrying on a business dies and their assets devolve to their legal personal representative, surviving joint tenant or trustee or beneficiary of a testamentary trust they will be eligible to utilise the small business concessions where: • the asset is disposed of within two years of the date of death • the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before his or her death. Consequently in your circumstances your deceased partner being in the same situation as yourself would have been eligible to disregard any capital gain on the sale of their share of the property under the 15-year exemption. Consequently if you sell the share of the property you inherited by x you will be able to disregard any capital gain under the 15 year exemption. | Detailed Reasoning - Additional Information: Please note the Commissioner has the discretion under subsection 152-80(3) of the ITAA 1997 to extend the two year period in limited situations. In determining whether the discretion to allow further time would be exercised, the Commissioner has considered the following factors: • evidence of an acceptable explanation for the period of the extension requested (and whether it would be fair and equitable in the circumstances to provide such an extension) • prejudice to the Commissioner which may result from the additional time being allowed (but the mere absence of prejudice is not enough to justify the granting of an extension) • unsettling of people, other than the Commissioner, or of established practices • fairness to people in like positions and the wider public interest • whether any mischief is involved, and • consequences of the decision.