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Edited version of private ruling
Authorisation Number: 1011552612300
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Ruling
Subject: Small business 15-year exemption
Question 1
Have you continuously owned the client register for the 15-year period ending just before the CGT event?
Answer
Yes.
Question 2
Provided that all of the other relevant conditions are satisfied, will the small business 15-year exemption in section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) apply in relation to the sale of the register?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2009
The scheme commences on:
1 July 2008
Relevant facts and circumstances
You commenced business and established a client register more than 15 years ago.
You also purchased and acquired client registers during the period of ownership.
You sold the client register.
There is only one client register. When further registers are bought and sold, clients are added to and subtracted from this register.
The clients in the registers sold are different to the clients in the registers acquired.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 110-25(5)
Income Tax Assessment Act 1997 Section 152-110
Does Part IVA apply to this ruling?
Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.
We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.
If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.
For more information on Part IVA, go to our website http://www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.
Reasons for decision
Under the small business 15-year exemption for companies in section 152-110 of the ITAA 1997, you can disregard any capital gain in relation to the sale of your client register if all of the following conditions are satisfied:
· the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain
· you continuously owned the client register for the 15-year period ending just before the CGT event
· you had a significant individual for at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the client register and
· an individual who was a significant individual of yours just before the CGT event either:
· was 55 or over at the time and the event happened in connection with the individual's retirement or
· was permanently incapacitated at that time.
Question 1
Paragraph 152-110(1)(b) of the ITAA 1997 requires that you continuously owned the client register for the 15-year period ending just before the CGT event.
In your case, there is only one client register. When further registers are bought and sold, clients are added to and subtracted from this register. The clients in the registers sold are different to the clients in the registers acquired.
Paragraph 35 of Taxation Ruling TR 2000/1 explains what happens when a purchaser acquires a client register and rights from a vendor. The paragraph covers acquisitions that are the result of novations or variations of agency agreements. It includes the following:
A novation of contracts involves a purchaser making a payment to a vendor to acquire from an insurance company the contractual rights foregone by the vendor who has surrendered an agency agreement. A variation of contracts involves a purchaser making a payment to a vendor to acquire from the insurance company the contractual rights foregone by a vendor who has varied an agency agreement. In both cases, the purchaser makes the payment either to increase the value of an existing agency agreement or to acquire valuable rights under a new agreement. A payment made to increase the value of an existing agency agreement is included in the cost base of that asset under subsection 110-25(5) [of the ITAA 1997], to the extent that the expenditure is reflected in the state or nature of the agency agreement at the time when it is surrendered or cancelled.
The paragraph suggests that if a purchaser acquires contractual rights from a vendor with the intention of increasing the value of an existing agency agreement, then the payment will be included in the cost base of that asset under subsection 110-25(5) of the ITAA 1997, to the extent that the expenditure is included in the state or nature of the register when it is surrendered or cancelled.
This confirms that the client registers acquired by you following the establishment of the original client register will form part of the original register to the extent that the expenditure is included in the state or nature of the register when it is surrendered or cancelled. As the registers which were acquired following the establishment of the original register were included in the original register at the time of its disposal, then these registers will form part of the original register.
As you established the client register more than 15 years ago, you will be considered to have owned the original asset, that is, the client register (which includes the client registers subsequently acquired), for at least 15 years ending just before the CGT event, being the disposal of the register.
Question 2
It has been determined above that you continuously owned the client register for the 15-year period ending just before the CGT event. This means that you satisfy condition (b) above for eligibility for the small business 15-year exemption.
Provided you satisfy the other conditions as detailed above, the small business 15-year exemption in section 152-110 of the ITAA 1997 will apply in relation to the sale of the register.
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