Do the owners meet the conditions to apply the small business 15-year exemption under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain made on the sale of the property?
Yes. This ruling applies for the following period : Year ending 30 June 2024 The scheme commenced on: 1 July 2023
In 19XX, person A and person B (the owners) purchased a property as joint owners (the property). In 20XX, a company was incorporated (the company). The owners were the sole shareholders of the company with each owning 50% of the company shares. The property was used by the company in the course of carrying on a business from the company's incorporation. The sum of the net value of all CGT assets owned by the owners and the company do not exceed $X million: In 20XX, the company ceased to carry on a business. Person B suffered a medical issue resulting in them being unable to engage in employment activities henceforth. In 20XX, the owners entered into a contract of sale for the property. Person A intends to cease their current employment and retire once the contract of sale for the property is settled. The owners are both over the age of 55.
Income Tax Assessment Act 1997 Division 152 Income Tax Assessment Act 1997 section 152-10 Income Tax Assessment Act 1997 section 152-15 Income Tax Assessment Act 1997 subsection 152-10(1) Income Tax Assessment Act 1997 section 152-35 Income Tax Assessment Act 1997 subsection 152-35(1) Income Tax Assessment Act 1997 paragraph 152-105 Income Tax Assessment Act 1997 subsection 328-125(1) Income Tax Assessment Act 1997 paragraph 328-125(2)(a)
15-year exemption Under paragraph 152-105 of the ITAA 1997, an individual can disregard a capital gain from a CGT event happening to a CGT asset if all the following conditions are satisfied: (a) the basic conditions under section 152-10 of the ITAA 1997; (b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event happened; and (c) either: (i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or (ii) you are permanently incapacitated at the time of the CGT event. Basic conditions The basic conditions for small business CGT relief, as set out in subsection 152-10(1) of the ITAA 1997 are: (a) a CGT event happens in relation to a CGT asset of yours in an income year (b) the event would (apart from this Division) have resulted in a 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; (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) 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. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Maximum net asset value test Section 152-15 of the ITAA 1997 outlined that you satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $6 million: (a) the net value of the CGT asset of yours, (b) the net value of the CGT assets of any entities connected with you, and (c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates. Active asset Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if: (a) 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 test period, or (b) 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 7½ years during the test period.
Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you. Entity connected with you Under subsection 328-125(1) of the ITAA 1997, an entity is connected with another entity if either entity controls the other entity. Paragraph 328-125(2)(a) of the ITAA 1997 provides that an entity controls another entity if it or its affiliate (or all of them together): owns, or has the right to acquire ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) of any distribution of income or capital by the other entity, or if the other entity is a partnership, the net income of the partnership or if the other entity is a company, owns, or has the right to acquire ownership of, equity interests in the company that give at least 40% of the voting power in the company. Permanently Incapacitated
Whether an individual is " permanently incapacitated " at the time of the CGT event depends on the particular circumstances of each case. The term "permanent incapacity" is also not defined in Subdivision 152-B of the ITAA 1997. However, the SIS Regs define permanent incapacity in relation to a fund member who has ceased to be gainfully employed due to ill health, whether physical or mental, as being where the trustee is reasonably satisfied that the member is unlikely to ever again engage in gainful employment for which the member is reasonably qualified. Application to your circumstances In this case, the property was used in the course of carrying on a horse training business by the company. As the shareholders of the company were person A and person B, with each shareholder owning more than 40% of shares in the company, the owners will be taken to control the company, and thus be connected with it. Since the property has been owned for more than 15 years and was used in the course of carrying on a business by a connected entity for over 7 ½ years, the property will satisfy the active asset test.
As the net value of the CGT assets owned by person A, person B and the company do not exceed $6 million, the owners will also be taken to have satisfied the maximum net asset value test. Therefore, the basic conditions for small business relief will be satisfied if the sale of the property results in a capital gain. The owners are both over the age of 55 and owned the property for more than 15 years prior to entering into the contract for the sale of the property. As person B suffered a medical issue resulting in them being unable to engage in gainful employment since, they will be taken to be permanently incapacitated. Person A also intends to retire from their main employment after the settlement of the property, establishing that sale of the property will be in connection with their retirement. Therefore, the owners meet the conditions to apply the small business 15-year exemption under Division 152 of the ITAA 1997 to disregard the capital gain made on the sale of the property.