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Ruling

Subject: Capital Gains Tax - 15 year exemption

Question 1

Is a company eligible for the small business Capital Gains Tax (CGT) 15 year exemption under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the sale of its business assets?

Answer

No.

Question 2

Is the sale of the business in connection with retirement if the relevant significant individual continues to work on a part-time basis?

Answer

Not applicable.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

A company sold its business. The business had been owned by the company for more than fifteen years. It has a sole shareholder.

The company was incorporated and the business commenced before 20 September 1985. It was a small business entity.

The sole shareholder is over 55 years old. He has been a CGT concession stakeholder and a significant individual of the company since its incorporation.

Prior to the sale of the company, the shareholder worked full-time in the business. Under the sale agreement, he is required to work for the new owner for two to three days a week until the end of the current financial year to ensure a smooth transition.

He has the opportunity to continue working for them thereafter on a reduced basis of one to two days per week. The period for which that arrangement would continue is at present indeterminate but, subject to health and the agreement of his employer, could conceivably be one to two years.

Relevant legislative provisions

Section 104-10 Income Tax Assessment Act 1997

Section 152-10 Income Tax Assessment Act 1997

Section 152-15 Income Tax Assessment Act 1997

Section 152-35 Income Tax Assessment Act 1997

Section 152-40 Income Tax Assessment Act 1997

Section 152-55 Income Tax Assessment Act 1997

Section 152-110 Income Tax Assessment Act 1997

Reasons for decision

Unless otherwise specified, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997.

Summary

In order for eligibility for the fifteen year exemption to be established, the requirements of sub-section 152-110(1) must be satisfied. Those requirements include meeting the basic conditions in section 152-10.

Amongst the conditions is that in paragraph 152-10(1)(b) which states that "the event would (apart from this Division) have resulted in the gain." In the present case, the event would not, even in the absence of Division 152, have resulted in a gain due to the gain being disregarded under paragraph 104-10(5)(a). Consequently, the exemption in section 152-110 is not available.

The significant individual who is the sole shareholder of the company would be affected in a different manner with section 152-105 being applicable to his circumstances.

Detailed reasoning

Section 104-10 states that CGT event A1 happens when you dispose of a CGT asset. However, the CGT small business relief provisions may reduce or eliminate liability to pay tax on capital gains associated with the disposal of CGT assets. Subdivision 152-B provides a fifteen year exemption as part of the small business concessions. If you qualify for the small business fifteen year exemption, the capital gain in question is entirely disregarded and it is unnecessary to apply any other concessions.

Section 152-110 addresses the fifteen year exemption as it applies to companies and trusts. Under section 152-110, the entity can disregard any capital gain arising from the disposal of an asset if all of the following conditions are satisfied:

(a)   the basic conditions in Subdivision 152-A are satisfied for the gain

(b)   the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event

(c)   the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset; and

(d)   an individual who was a significant individual of the entity just before the CGT event was either:

(i) at least 55 years old at that time and the event happened in connection with their retirement or

(ii)  permanently incapacitated at that time.

Paragraph 152-110(1)(a)

In order to gain access to the concessions, the basic conditions in section 152-10 must be met. The basic conditions are:

a) that a CGT event happens in relation to a CGT asset of yours in an income year;

b) the event would have (apart from this Division) resulted in the gain;

c) that 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 in section 152-15;

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

d) that the relevant CGT asset satisfies the active asset test in section 152-35.

For present purposes, the significant element is paragraph (b). Paragraph 152-10(1)(b) states that it is a requirement that "the event would (apart from this Division) have resulted in the gain." That is, in the absence of the concessions in Division 152 a capital gain would have ensued.

If an asset was acquired before 20 September 1985, then any capital gain or capital loss on its disposal is disregarded in accordance with paragraph 104-10(5)(a). Therefore, as the asset in question was acquired prior to 20 September 1985, its disposal would have been exempted from the CGT provisions by the operation of paragraph 104-10(5)(a) and would therefore not have resulted in a gain for the purposes of paragraph 152-10(1)(b).

It follows that, as the compulsory requirements of paragraph 152-10(1)(b) have not been fulfilled, the basic conditions for the small business concessions would not be met, paragraph 152-110(1)(a) would not be satisfied and access to section 152-110 denied.

Please note that this private ruling has addressed the outcome from the perspective of the taxpayer named in the ruling application. If the significant individual of the company sells or otherwise disposes of his share in the company, he may be able to utilize section 152-105 despite the failure to satisfy paragraph 152-10(1)(b) if the requirements of section 292-100 are satisfied.

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