Private ruling: Capital gains tax small business concessions
Published: September 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is your spouse considered an affiliate of yours for the purposes of the active asset test? | A1: Yes | Q2: Is the property considered an active asset? | A2: Yes | Q3: Are you entitled to entirely disregard any capital gain made on the sale of the property by applying the capital gains tax (CGT) small business 15-year exemption concession? | A3: Yes

Relevant facts and circumstances: You have a spouse. You and your spouse have net assets of less than $6 million. You have owned the property since the late 1980s, when it was transferred to you from your spouse. Your spouse operated a business as a sole trader from the property and paid you rent for the property until they sold the business in the late 1990s. From the date your spouse sold the business until the disposal of the property in the 2011-12 financial year (date of sale contract), you leased the property to arm's length tenants. You were over 55 years of age and retired at the time of the disposal of the property.

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 152-10(1A) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 subsection 152-40(4A) | Income Tax Assessment Act 1997 section 328-130 | Income Tax Assessment Act 1997 section 152-47 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 152-105

Reasons for decision: Summary: As your spouse used an asset of yours in a business carried on as an individual, they are considered to be your affiliate for the purposes of the active asset test. The property is considered an active asset of yours as it was used in a business carried on by your affiliate for more than 7 ½ years. You are entitled to entirely disregard the capital gain made on the sale of the property as you satisfy all the necessary conditions to apply the small business 15-year exemption concession. As you qualify for the 15-year exemption, you do not need to apply any other small business capital gains tax (CGT) concessions. | Detailed Reasoning - 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 CGT event happens in relation to a CGT asset in an income year. · the event would have resulted in the gain at least one of the following applies: · you are a small business entity for the income year · you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 · 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 · 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. · 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. Section 152-35 of the ITAA 1997 explains that an asset will be an active asset if you have owned the asset for more than 15 years and it was an active asset for a total of at least 7 ½ years from the time when you acquired the asset until the CGT event. 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. However, subsection 152-40(4A) of the ITAA 1997 allows you to treat any use by your affiliate, or an entity that is connected with you, as your use. Section 328-130 of the ITAA 1997 provides that an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. Section 152-47 of the ITAA 1997 provides that for the purposes of the active asset test, your spouse would be considered your affiliate, where you own an asset that your spouse uses in a business they carry on as an individual. In your case, CGT event A1 (section 104-10 of the ITAA 1997) relating to the disposal of an asset (the property), has occurred. The event has resulted in a capital gain and, you state that you satisfy the maximum net asset value test. You have owned the asset since the late 1980s and it has been an active asset for at least 7 ½ years as it has been used in the course of carrying on a business by your affiliate. Based on the information provided, you have satisfied the basic conditions required to be eligible for the small business CGT concessions. Accordingly, you are automatically entitled to the 50% active asset reduction for the capital gain made on the disposal of the property. | Detailed Reasoning - 15-year exemption: 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: · you satisfy the basic conditions · you continuously owned the CGT asset for the 15-year period ending just before the CGT event · you are either: · 55 or over at the time of the CGT event and the event happens in connection with your retirement; or · permanently incapacitated at the time of the CGT event. In your case: · you satisfy the basic conditions · you have owned the asset for over 15 years · you were over the age of 55 at the time of the CGT event · you are already retired. Accordingly, you may entirely disregard the capital gain under the 15-year exemption concession. As you qualify for the 15-year exemption, you do not need to apply any other small business concessions. Further, you do not have to apply capital losses against your capital gain before applying the 15-year exemption.

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