Edited version of your private ruling

Authorisation Number: 1012496992164

Ruling

Subject: CGT Small Business 15-Year Exemption

Question 1

Is the taxpayer eligible for the small business 15-year exemption under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) for CGT assets it had owned for less than 15 years?

Answer

No

Question 2

Is the taxpayer eligible for the small business 50% reduction under section 152-205 of the ITAA 1997 for CGT assets to be sold-off individually?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 20ZZ

The scheme commenced on

1 July 20YY

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The taxpayer is a company and has been operating several stores for over 15 years. All stores operate under the same trading name.

The taxpayer is planning to sell the goodwill of several stores individually to different buyers over a 12 month period.

The company has one shareholder who is over 60 years old, and has owned the shares since the business started. The shareholder wants to sell the business and retire.

The stores have been set up at different times over a span of more than 15 years.

We are advised that the sum of the net value of the CGT asset of the taxpayer, the CGT assets of any entities connected with the taxpayer and the CGT assets of any affiliates of the taxpayer entities connected with the taxpayer's affiliates, just before the CGT event, does not exceed $6,000,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-105,

Income Tax Assessment Act 1997 section 152-205,

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 152-50,

Income Tax Assessment Act 1997 section 152-55,

Income Tax Assessment Act 1997 Subdivision 152-C,

Income Tax Assessment Act 1997 Subdivision 152-D,

Income Tax Assessment Act 1997 Subdivision 152-E and

Income Tax Assessment Act 1997 section 102-5.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Reasons for decision

Question 1

Summary

The taxpayer cannot disregard any capital gain arising from a CGT event under the small business 15-year exemption provided for by section 152-105 of the ITAA 1997 for CGT assets it owned for less than 15 years just before the CGT event.

Detailed reasoning

Section 152-105 of the ITAA 1997 provides that an individual can disregard any capital gain arising from a CGT event under the small business 15-year exemption if all of the following conditions are satisfied:

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

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

(c) if the CGT asset is a share in a company or an interest in a trust- the company or trust 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 you owned the CGT asset.

(d) 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.

Section 152-50 of the ITAA 1997 provides that an entity satisfies the significant individual test if the entity had at least one significant individual just before the CGT event.

Section 152-55 of the ITAA 1997 defines a significant individual as an individual in a company or a 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%.

Basic conditions for relief

For the capital gain to qualify for the small business relief contained within Division 152 of the ITAA 1997, the four basic conditions in subsection 152-10(1) of the ITAA 1997 must generally be satisfied. These conditions are:

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

(b) the event would 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;

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

(d) the CGT asset satisfies the active asset test.

Section 152-15 of the ITAA 1997 provides that the maximum net asset value test is satisfied if the sum of the net value of the CGT asset of the taxpayer, the CGT assets of any entities connected with the taxpayer and the CGT assets of any affiliates of the taxpayer entities connected with the taxpayer's affiliates, just before the CGT event does not exceed $6,000,000.

Subsection 152-35(1) of the ITAA 1997 provides the basic conditions for a CGT asset to satisfy the active asset test as follows:

(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 period specified in subsection (2); 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 period specified in subsection (2).

Subsection 152-35(2) of the ITAA 1997 provides that the period begins when you acquired the asset and ends at the earlier of either the CGT event; and if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows- the cessation of the business.

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if, at that time you own the asset; and

(a) it is used or held ready for use in the course of carrying on a business by you, your affiliate or another entity that is connected with you; or

(b) it is an intangible asset that is inherently connected with a business you carry on.

In this case, the taxpayer advised that the businesses were set-up at different times over a span of more than 15 years.

Conclusion

The taxpayer therefore cannot disregard any capital gain arising from a CGT event under the small business 15-year exemption provided for by section 152-105 of the ITAA 1997 for CGT assets it owned for less than 15 years just before the CGT event.

Question 2

Summary

As the taxpayer satisfies the basic conditions in Subdivision 152-A of the ITAA 1997, it can avail of the small business 50% reduction as provided for by section 152-205 of the ITAA 1997 for its CGT assets to be sold-off individually.

Detailed reasoning

Section 152-205 of the ITAA 1997 states that the amount of a capital gain remaining after applying step three of the method statement in subsection 102-5(1) of the ITAA 1997 is reduced by 50%, if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain.

Subsection 102-5(1) of the ITAA 1997 provides the 5 steps in working out net capital gain to be included in assessable income for the year as follows:

Step 1

Reduce the capital gains made during the income year by the capital losses made during the income year.

Step 2

Apply any previously unapplied net capital losses from earlier income years to reduce the amounts remaining after reduction of capital gains under step 1, including any capital gains not reduced under that step because the capital losses were less than the total of the capital gains.

Step 3

Reduce the discount percentage each amount of a discount capital gain remaining after step 2.

Step 4

If any of the capital gains, whether or not they are discount capital gains, qualify for any of the small business concessions in Subdivisions 152-C, (the 50% reduction), 152-D, (the retirement concession) and 152-E, (the roll-over), apply those concessions to each capital gain as provided for in those Subdivisions.

Step 5

Add up the amounts of capital gains remaining after step 4. The sum is the net capital gain for the income year.

Conclusion

As the taxpayer satisfies the basic conditions in Subdivision 152-A of the ITAA 1997, it can avail of the small business 50% reduction as provided for by section 152-205 of the ITAA 1997 for its CGT assets to be sold-off individually.

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