Do you meet the conditions to apply the capital gains tax (CGT) small business 15-year exemption under Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the sale of the property?
Yes This ruling applies for the following period : Year ending 30 June 20XX The scheme commences on: 1 July 20XX
Person A and Person B (you) jointly acquired a property (the property) after 19 September 1985. A business (the business) was carried on by a connected entity, ABC Pty Ltd (the company) upon acquiring the property. Person A and Person B are both the shareholders of the company. The company's annual turnover for the 20XX-20XX income year is expected to be less than $XXX million. In December 20XX, due to an accident you needed to engage another person to continue carrying on the business. You returned to the property X months later and continued running the business again until September 20XX. In October 20XX the company leased the property and the plant and equipment to an unrelated third party for $X per week where the lessee was required to maintain the property for the purpose of sale. After the company leased the property, it commenced winding up the business. The winding up of the business and the sale of the property were steps toward your retirement. You are both over 55 years of age. On XX October 20XX you entered a Contract for sale for the property.
Income Tax Assessment Act 1997 section 152-10 Income Tax Assessment Act 1997 section 152-105 Income Tax Assessment Act 1997 section 152-49 Income Tax Assessment Act 1997 Subdivision 152-B
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. Section 152-105 of the ITAA 1997 provides that an individual can apply the small business 15 year exemption and 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. Basic conditions Section 152-10 of the ITAA 1997 contains the basic conditions that must be satisfied to be eligible to apply the CGT small business concessions. These conditions are: a CGT event happens in relation to a CGT asset in an income year. the event would (apart from this Division) 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; 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 you do not carry on a 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. the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. All four of the basic conditions must be met. Additionally, in circumstances where a business is in the process of winding up, section 152-49 of the ITAA 1997 may have application. Relevantly, section 152-49 of the ITAA 1997 applies to an entity that, in the year in which the CGT event happens, carried on a business in an earlier year and is now being wound up, and the asset had been used in the course of carrying on that business at the time the business stopped being carried on.
The effect of section 152-49 of the ITAA 1997 in this matter is, that for the purposes of the active asset test and the basic conditions in paragraphs 152-10(1A)(d) of the ITAA 1997, the entity can be taken to be carrying on the business at the time of the CGT event, and the asset can be taken to be used in the course of carrying on that business at that time. Application to your circumstances Basic conditions
In your case, there was a CGT event A1 triggered upon the sale of the property which resulted in a capital gain. You do not carry on a business however the property was used in the business carried on by the company prior to that business being wound up. The company is a small business entity that is connected with you. Although the business was wound up in a prior income year, section 152-49 of the ITAA 1997 will apply to treat the property as being used by the company in its business at the time the property was sold, satisfying the basic condition under subparagraph 152-10(1)(c)(iv) of the ITAA 1997. You have held the property for more than 15 years and the property was used in the company's business for more than 7.5 of those years, satisfying the active asset test. As all four conditions have been met, you satisfy the basic conditions to apply the CGT small business concessions. 15 year exemption
As previously discussed, you satisfy the basic conditions to apply the CGT small business concessions and you have held the property for more than 15 years. You are over 55 years and the disposal of the property is considered to be in connection with your retirement. As all the conditions have been met, you are able to apply the small business 15 year exemption to disregard the capital gain made on the disposal of the property.