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1 Do you meet the conditions to apply the small business retirement exemption in Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard all or part of the capital gain made on the sale of the Property?

1 Yes. This ruling applies for the following period : The year ended 30 June 20XX The scheme commenced on: 1 July 20XX

You are over 55 years of age. You acquired a property after 20 September 1985. The Property is consists of four separate tenancies. You provided the square metre area for each tenancy. You have conducted a business out of one of the tenancies from the date of acquisition. The remaining three tenancies were leased to unrelated third-party tenants for the entire ownership period. Rent was paid to you by the third-party tenants. No rent was paid to you by your Business. You provided the aggregated business turnover of your Business and your total rental income earned from the Property throughout your ownership of the Property. The Property was sold more than 15 years after it was acquired. You will not be reducing your working hours or changing your present income earning activities in relation to the sale of the Property. You have not used any of your $X CGT retirement exemption limit. You will make a choice in writing of any amount you choose to disregard under the small business retirement exemption, by the day your income tax return is lodged.

Income Tax Assessment Act 1997 section 103-25 Income Tax Assessment Act 1997 section 152-10 Income Tax Assessment Act 1997 section 152-35 Income Tax Assessment Act 1997 section 152-40 Income Tax Assessment Act 1997 section 152-305 Income Tax Assessment Act 1997 section 152-310 Income Tax Assessment Act 1997 section 152-315 Income Tax Assessment Act 1997 section 152-320 Income Tax Assessment Act 1997 section 328-110

Summary You may choose to apply the small business retirement exemption to reduce the capital gain (up to the $X lifetime limit) you made on the sale of the Property, because you meet the basic conditions in Subdivision 152-A of the ITAA 1997, and you will meet the additional conditions for the retirement exemption in Subdivision 152-D of the ITAA 1997. Detailed reasoning In order to access the small business CGT concessions, first the basic conditions in Subdivision 152-A of the ITAA 1997 must be satisfied for the gain. The basic conditions in Subdivision 152-A of the ITAA 1997 relevant to you are: •                A capital gains tax (CGT) event happens in relation to a CGT asset of yours in an income year •                The event would (apart from Division 152 of the ITAA 1997) have resulted in a gain •                You are a CGT small business entity for the income year •                The CGT asset satisfies the active asset test CGT event A1 occurred to the Property when it was sold, which would have resulted in a gain. CGT small business entity You are a CGT small business entity for an income year if: •                You carry on a business in that income year, and

•                Your aggregated turnover in that income year or the previous income year was less than $2 million. We are satisfied that a business carried on by you in the relevant income year, and that the aggregated turnover of the Business in that year was less than $2 million. Active asset test The active asset test is contained in section 152-35 of the ITAA 1997. Where an asset is owned for more than 15 years, the test is satisfied if it was an active asset for a total of at least 7.5 years in the test period. Generally, the test period begins when the asset was acquired and ends at the CGT event. Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset if it is owned and used, or held ready for use, by you, your affiliate, or another entity that is connected with you in the course of carrying on a business that is carried on, whether alone or in partnership. There are exceptions to what can be considered an active asset. An asset whose main use by you to derive rent is excluded from being an active asset under paragraph 152-40(4)(e) of the ITAA 1997. Main use to derive rent

Subsection 152-40(4A) of the ITAA 1997 provides that in working out the main use of an asset, you disregard any personal use or enjoyment of the asset by you and treat any use by your affiliate as your use. Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? (TD 2006/78) discusses the circumstances in which a premises used in a business of providing accommodation may satisfy the active asset test, despite the exclusion under paragraph 152-40(4)(e) of the ITAA 1997. Whether an asset's main use is to derive rent will depend upon the particular circumstances of each case. In accordance with paragraph 22 of TD 2006/78, the term 'rent' has been described as follows: •                the amount payable by a lessee to a lessor for the use of the leased premises,

•                a tenant's periodical payment to an owner or landlord for the use of land or premises, •                recompense paid by a tenant to a landlord for the exclusive possession of corporeal hereditaments. The modern conception of rent is a payment which a tenant is bound by contract to make to his landlord for the use of the property let. Paragraph 26 of TD 2006/78 provides some guidance on how main use might be determined where there is mixed use: 'If an asset is used partly for business and partly to derive rent at any given time, it will be a question of fact dependent on all the circumstances as to whether the main use of the asset at that time is to derive rent. No one 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 in TD 2006/78, which considers mixed use of a property, provides:

'Mick owns land on which there are a number of industrial sheds. He uses one shed (45% of the land by area) to conduct a motorcycle repair business. He leases the other sheds (55% of the land by area) to unrelated third parties. The income derived from the motorcycle repair business is 80% of the total income (business plus rentals) derived 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.' Application to your circumstances

For most of your ownership period the Business used X square meters of the Property, with a further X square meters being used to derive rent from third party tenants. The portion used for Business purposes during that time was approximately X%. For the minority of your ownership period, after an addition to the Property, the Business used X square meters of the Property, with the further X square meters continuing to be used to derive rent from third party tenants. The portion used for Business purposes increased to approximately X% during that time. Throughout your ownership period we consider that a substantial (but not majority) portion of the Property was used for Business purposes. The business proportion of the Property has consistently derived the large majority of the total income from the use of the Property. The Business use of the property represented an average of X% of the total income derived from the property across all years of ownership.

Given the comparative areas of use of the Property, and the comparative levels of income derived from rent and business use of the Property, we conclude that the main use of the Property was not to derive rent and accordingly the Property is not excluded from being an active asset by paragraph 152-40(4)(e) of the ITAA 1997. You owned the Property for more than 15 years, and it was used in the Business for more than 7.5 years. The Property meets the active asset test in section 152-35 of the ITAA 1997. Therefore, we conclude that the basic conditions in Subdivision 152-A of the ITAA 1997 are met. Conditions for the retirement exemption Under subsection 152-305(1) of the ITAA 1997 an individual over 55 years of age can choose to disregard all or part of a capital gain if they meet the basic conditions in Subdivision 152-A of the ITAA 1997. The choice must be made: (a)           by the day you lodge your income tax return for the income year in which the relevant CGT event happened, or (b)           within a further time allowed by the Commissioner (section 103-25 of the ITAA 1997), and

(c)            in a way that ensures that your CGT retirement limit [of $500,000] is not exceeded (paragraph 152-315(2)(a) of the ITAA 1997). The amount chosen for the asset is the CGT exempt amount (subsection 152-315(3) of the ITAA 1997). The CGT exempt amount must be specified in writing (subsection 152-315(4) of the ITAA 1997). As outlined above, you have satisfied the basic conditions in Subdivision 152-A of the ITAA 1997 in relation to the disposal of the Property. You are over 55 and are therefore not required to make a contribution to a complying superannuation fund or an RSA in order to choose the retirement exemption under subsection 152-305(1) of the ITAA 1997. Accordingly, you may choose to apply the small business retirement exemption to reduce the capital gain you made on the disposal of the Property. To meet the requirements of section 152-315 of the ITAA 1997, you will make the choice in writing by the day you lodge your income tax return, specifying the amount to be disregarded under the retirement exemption (up to your $X CGT lifetime retirement exemption limit).