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Ruling
Subject: CGT small business concessions - 15 year exemption
Question
Are you entitled to the small business 15 year exemption?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 2013
The scheme commenced on:
1 July 2012
Relevant facts and circumstances
Company X (the company) is the head company of a consolidated group.
The company satisfies the basic conditions contained in subdivision 152-A of the ITAA 1997.
C and D have each held a 50% share in the company since its incorporation. They are also the only directors of the company.
Company Y is a wholly owned subsidiary of the company and runs a business.
It is intended to sell the business.
The business has been conducted through Company Y since its incorporation.
Prior to consolidation, C and D also each held a 50% share in the subsidiary company. They held these shares since incorporation of the subsidiary company.
Following the sale of the business, C and D intend to retire completely; they will not have any ongoing role in the business.
C and D are both over 55 years of age.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 152-110
Income Tax Assessment Act 1997 Section 701-1
Income Tax Assessment Act 1997 Section 701-5
Reasons for decision
Summary
In accordance with section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997), where a CGT event occurs in relation to the sale of an asset by a subsidiary member of a consolidated group, the event is taken to have happened to the head entity of the group. As the company satisfies all of the conditions contained in section 152-110 of the ITAA 1997, it will be able to apply the small business 15 year exemption to the sale of the business.
Detailed reasoning
Section 152-110 of the ITAA 1997 provides a small business 15 year exemption for companies and trusts. Under this section, a company can disregard the capital gain from the disposal of a CGT asset if:
a) the company satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions
b) the company continuously owned the CGT asset for the 15-year period ending just before the CGT event happened
c) the company 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 time the company owned the CGT asset; and
d) an individual who was a significant individual of the company just before the CGT event was either:
· at least 55 years old at that time and the event happened in connection with their retirement
· or permanently incapacitated at that time.
Under the single entity rule contained in section 701-1 of the ITAA 1997, a CGT event from the sale of an asset by a subsidiary member is taken to happen to the head company of a consolidated group. Any resulting capital gain or loss is therefore made by the head company.
Accordingly, it is the head company that must satisfy the conditions contained in section 152-110 of the ITAA 1997 if it wishes to use the small business 15 year exemption to reduce a capital gain from the sale of an active asset.
Ownership of 15 years or more
The entry history rule contained in section 701-5 of the ITAA 1997 states that everything that happened to an entity before it became a subsidiary member is taken to have happened in relation to the head company for the purposes of working out the head company's liability for income tax.
The business has been run through the subsidiary company. Under the entry history rule, the company is taken to have acquired the business from the date the subsidiary company acquired it. Accordingly, the company is taken to have continuously owned the business for more than 15 years.
Significant individual test
An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%; this 20% can be made up of direct and indirect percentages.
Similarly, under the entry history rule, the head company inherits the subsidiary's history in respect of the significant individual test contained under paragraph 152-110(1)(c) of the ITAA 1997. Therefore, where consolidation occurred less than 15 years ago, whether or not the subsidiary company had a significant individual is relevant in determining whether the head company meets the condition.
Both C and D are significant individuals of the head company as they each hold a small business participation percentage of 50%. However, the consolidation of the group occurred less than 15 years ago. Therefore, to meet the requirement under paragraph 152-110(1)(c) of the ITAA 1997 we need to determine if the subsidiary company had a significant individual for the relevant period of time. In this case, prior to consolidation, C and D were also both significant individuals of the subsidiary company since its incorporation over 20 years ago. Accordingly, the company will meet the significant individual test for the 15 year exemption.
In connection with retirement
Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement.
C and D are the relevant significant individuals. Following the sale of the business, it is C and D's intention to retire completely from the workforce; they will not have any ongoing role in the business. As both C and D are over 55, will be significant individuals at the time of the CGT event, and the event will be in connection with their retirement, the company will satisfy the condition under paragraph 152-110(1)(d) of the ITAA 1997.
Conclusion
The company satisfies the basic conditions and the other conditions contained under section 152-110 of the ITAA 1997. Accordingly the company is entitled to apply the 15 year exemption to reduce any capital gain that is made on the sale of the business.
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