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Ruling

Subject: CGT small business concessions

Question 1

The small business retirement exemption provisions are contained in Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997). An entity that is a company or trust can choose to disregard all or a part of a capital gain if:

· It satisfies the basic conditions on Subdivision 152-A of the ITAA 1997

· It satisfies the significant individual test

· It keeps a written record of the amount it chooses to disregard and if there are more than one CGT concession stakeholders, each stakeholder's percentage of the exempt amount

· It makes a payment to at least one of the CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount

· The payment must be equal to the exempt amount or the amount of the capital proceeds, whichever is less

· If a CGT concession stakeholder is under 55 years of age just before receiving a payment, an amount equal to that payment must be immediately paid to a complying superannuation fund or retirement savings account

· In the case of a capital gain from a CGT event J5 the payment must be made seven days after you choose to disregard the capital gain.

Where a capital gain arises from a CGT event J5, a company or trust does not have to satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 again - refer subsection 152-305 (4) of the ITAA 1997.

Does the company pass the 'significant individual' test?

Section 152-55 of the ITAA 1997 states that:

An individual is a significant individual in a company or trust at a time if, at that time, the individual has a small business participation percentage in the company or trust of at least 20%

In this instance Person A has held a small business participation percentage in the company of 100% until they disposed of a small interest in the company to their spouse, person B. However at all times person A has maintained a business participation percentage of at least 20%. Therefore the company passes the significant individual test.

Is there a CGT concession stakeholder?

The definition of CGT concession stakeholder is contained in section 152-60 of the ITAA 1997. It states:

An individual is a CGT concession stakeholder of a company or trust at a time if the individual is:

(a) a significant individual of a company or trust; or

(b) a spouse of a significant individual in the company or trust, if the spouse has a small business participation percentage in the company or trust at that time that is greater than zero.

Person B will qualify as a CGT concession stakeholder as they are the spouse of a significant individual and they have a business participation percentage greater than zero.

Therefore the company would be able to apply the small business retirement concession if a CGT event J5 occurs and a capital gain arises from that event. The capital gain will be equal to the amount of the capital gain previously disregarded under Subdivision 152-E of the ITAA 1997 (the small business rollover).

Question 2

Subsection 102-5(1) of the ITAA 1997 sets out the method for calculating your net capital gain:

Step1: Reduce the capital gains you made during the income year by the capital losses (if any) you made during the income year.

Step 2: Apply any previously unapplied net capital losses from earlier income years to reduce the amounts (if any) remaining after the reduction of capital gains under step 1

Step 3: Reduce by the discount percentage each amount of a discount capital gain remaining under step 2 (if any).

Step 4: If any of your capital gains (whether or not they are discount capital gains) qualify for any of the small business concessions in Subdivisions 152-C, 152-D and 152-E, apply those concessions to each capital gain as provided for in those Subdivisions.

Step 5: Add up the amounts of capital gains (if any) remaining under step 4. The sum is your net capital gain for the income year.

Capital gains cannot be reduced by amounts which are deductible under section 8-1 of the ITAA 1997.

The company made a capital gain of $XXX from the sale of its business during the year ended 30 June 20XX. The company then elected to utilise the small business retirement exemption and made a payment of $XXX into Person A's complying superannuation fund.

Of the remaining capital gain, the company elected to roll over an amount of $XXX under Subdivision 152-E of the ITAA 1997.

As the company has not elected to apply any of the small business concessions to the remaining $XXX capital gain, this amount must be included in the company's assessable income for the year ended 30 June 20XX.

Question 3

Requirements for Subdivision 152-E rollover.

A taxpayer can choose to obtain a small business asset rollover if the basic conditions for small business concessions are satisfied and the replacement asset is an active asset. The meaning of "active asset" is contained in section 152-40 of the ITAA 1997:

A CGT asset is an "active asset" at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or hold it ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

As can be seen from the provision quoted above, the legislation clearly contemplates situations where active assets are held by a partnership carrying on a business. Therefore if active assets are acquired by a partnership of the company and another entity, the asset will qualify as a replacement asset for the purposes of Subdivision 152-E of the ITAA 1997.

Question 4

See response to question 1.

If the company subsequently sells its business and makes a capital gain from the disposal of an active asset(s) it will be eligible to utilise the small business retirement exemption, provided that the conditions in Subdivision 152-A and 152-D of the ITAA 1997 are met at that time.

Person B will qualify as a CGT concession stakeholder as they are the spouse of a significant individual and they have a business participation percentage of greater than zero.

Question 5

The company will qualify for the small business rollover if it acquires replacement assets in its own right provided that the conditions in Subdivision 152-A and 152-E are met at that time. The fact that person B has acquired a small interest in the company does not alter the outcome because the rollover concession applies to the company and not to the shareholders.

Question 6

If the company subsequently sells it business and makes a capital gain from the disposal of an active asset(s) it will be eligible for the small business retirement exemption, provided that the conditions in Subdivision 152-A and 152-D of the ITAA 1997 are met at that time. Person B will qualify as a CGT concession stakeholder as they are the spouse of a significant individual and they have a business participation percentage of greater than zero.

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