Private ruling: Small business concessions
Published: September 2012
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Will you qualify for the capital gains tax (CGT) small business 15 year exemption where the property has not been held for at least 15 years at the time of the CGT event or at the time of death? | A4: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 104-10 | Income Tax Assessment Act 1997 - Division 115 | Income Tax Assessment Act 1997 - Division 152 | Income Tax Assessment Act 1997 - Subdivision 152-A | Income Tax Assessment Act 1997 - Subdivision 152-B | Income Tax Assessment Act 1997 - Subdivision 152-C | Income Tax Assessment Act 1997 - Subdivision 152-D

Reasons for decision: Detailed Reasoning - CGT concessions: Providing certain criteria are met, individuals (including partners in partnerships) may be able to reduce any capital gain in the following sequence. First you offset capital losses against capital gains. Then you apply: · the small business 15-year exemption if applicable · the CGT discount · the small business CGT concessions. 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. | Detailed Reasoning - 15 year exemption: You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you: · satisfy the basic conditions for the small business CGT concessions (the active asset test requires the asset to have been an active asset for at least 7.5 years of the whole period of ownership) · continuously owned the CGT asset for the 15 year period ending just before the CGT event happened. In the case of death, the deceased's legal personal representative or beneficiary of the deceased estate will be only be eligible for the 15 year exemption to the same extent that the deceased would have been just prior to their death, except that: · the CGT event does not need to be in connection with the retirement of the deceased · the deceased needs to have been 55 or older immediately before their death, rather than at the time of the CGT event. In your case, you have not yet held the property for at least 15 years. Therefore, you do not qualify for the small business 15 year exemption at this time. If the 15-year exemption doesn't apply, you apply the CGT discount (if applicable) to the capital gain before applying the remaining small business concessions. If you satisfy the conditions for more than one of the remaining small business concessions, you may apply each of those concessions to different parts of the capital gain. After applying any capital losses, individuals and trusts eligible for both the CGT discount and the small business 50% active asset reduction can reduce a capital gain by 75% (that is, by 50% then 50% of the remainder). | Detailed Reasoning - Discount capital gain: CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 , relating to the disposal of a CGT asset, will happen when you dispose of the property. You will make a capital gain if the capital proceeds from the disposal are more than the cost base. You will make a capital loss of those capital proceeds are less than the reduced cost. You will be eligible for the discount capital gains where: · you are an individual · the CGT event happened after 21 September 1999 · the capital gain must be calculated without any reference to indexation of the cost base; and · the CGT asset was acquired more than 12 months the CGT event. | Detailed Reasoning - The discount percentage is 50%.: Where a capital gain meets these requirements, that capital gain is a discount capital gain. Generally, the discount percentage is applied to the discount capital gain, to arrive at your net capital gain. Based on the facts, you will be eligible for the discount capital gains of 50% if your capital gain is calculated without any reference to indexation of the cost base. | Detailed Reasoning - 50% active asset reduction: Unlike the other small business concessions, the small business 50% active asset reduction applies automatically if the basic conditions are satisfied, unless you choose for it not to apply. To apply the small business 50% active asset reduction, you need to satisfy only the basic conditions. There are no further requirements. In your case, you satisfy the basic conditions and the small business 50% active asset reduction will apply. | Detailed Reasoning - Retirement exemption: You may choose to apply the small business retirement exemption after the CGT discount has been applied and the small business 50% active asset reduction, that is, to the remaining 25% of the capital gain. 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). If you are 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA For an individual choosing the retirement exemption, there is no requirement to terminate any activity or cease their business. The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) must not exceed your 'CGT retirement exemption limit' or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment. An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. This includes amounts disregarded under former (repealed) retirement exemption provisions. As discussed above, you satisfy the basic conditions and you are both over 55 years of age. Therefore, providing you have no previous CGT exempt amounts disregarded under the retirement exemption, both you and your spouse will be able to choose to disregard up to $500,000 each under the retirement exemption by simply keeping a record of the amount you chose to disregard. | Detailed Reasoning - Example of applying multiple concessions: Ken is a small business operator who sells an active asset that he has owned for more than 12 months. He makes a capital gain of $2,000,000. Assuming he satisfies all the conditions for the CGT discount and the small business concessions, Ken calculates his net capital gain as follows: Net capital gain Capital gain $2,000,000 After 50% CGT discount $1,000,000 After 50% small business reduction $500,000 After maximum small business retirement exemption $0

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | 2. Do you qualify for the 50% CGT discount? | 3. Do you qualify for the additional small business 50% active asset reduction? | 4. Do you qualify for the CGT small business retirement exemption up to a lifetime limit of $500,000? | Relevant facts: You and your spouse purchased a property almost 15 years ago. | From the date of acquisition, the property has been used in your primary production business activity. | Due to a terminal illness, you now wish to transfer the property to your children with a supporting valuation. | You will have held the property for 15 years within the next year, due to illness, may need to dispose of the property prior to this date. | Both you and your spouse are over 55 years of age. | Your primary production business activity is a small business for the purposes of the CGT small business concessions. | The property is considered to be an active asset for the purposes of the CGT small business concessions.