Edited version of your written advice

Authorisation Number: 1012765270348

Ruling

Subject: Income tax - Capital gains tax - Small business relief - 15 year exemption

Question 1

Can the Taxpayer use the small business 15-year exemption under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain that arose from the sale of the Property in 20XX?

Answer

Yes

Question 2

If the answer to Question 1 is "Yes", will any payment by the Taxpayer to the Shareholder within two years after 20XX in relation to the disregarded capital gain be exempt up to the total amount of that capital gain under section 152-125 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The Shareholder is a resident individual who was born in 19XX.

The Taxpayer is a resident private company which was incorporated in 19XY. The Shareholder has owned:

• at least 33.33% of the Taxpayer's ordinary shares from 19XY to 20XX, and

• 100% of the Taxpayer's ordinary shares from 20XX to 20XX.

In 19XY, the Taxpayer acquired the Property.

From 199X to 20XY, the Property was used in the multiple businesses carried on at various times by the Taxpayer for a total of X years of that period.

As of 20XY, all but one of those multiple businesses have either been sold or closed down, with the remaining business carried on by the Taxpayer at another property since 20YY, albeit in a substantially reduced form since 20XY.

Coinciding with this, was the cessation of the Shareholder's working hours and duties in the businesses that have either been sold or closed down, and the substantial reduction in the Shareholder's working hours and duties since 20XY in the remaining business that had been carried on by the Taxpayer at another property since 20YY.

In 20YY, the Taxpayer sold the Property, which resulted in a capital gain.

As at 20YY, the net value of the CGT assets of the Taxpayer and its affiliates were $X.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Subsection 104-10(4),

Income Tax Assessment Act 1997 Section 108-5,

Income Tax Assessment Act 1997 Subdivision 152-A,

Income Tax Assessment Act 1997 Subsection 152-10(1),

Income Tax Assessment Act 1997 Section 152-15,

Income Tax Assessment Act 1997 Section 152-20,

Income Tax Assessment Act 1997 Section 152-35,

Income Tax Assessment Act 1997 Subsection 152-40(1),

Income Tax Assessment Act 1997 Section 152-50,

Income Tax Assessment Act 1997 Section 152-55,

Income Tax Assessment Act 1997 Section 152-60,

Income Tax Assessment Act 1997 Section 152-65,

Income Tax Assessment Act 1997 Subsection 152-70(1),

Income Tax Assessment Act 1997 Section 152-110,

Income Tax Assessment Act 1997 Subsection 152-110(1),

Income Tax Assessment Act 1997 Section 152-125,

Income Tax Assessment Act 1997 Subsection 152-125(1) and

Income Tax Assessment Act 1997 Subsection 152-125(2).

Reasons for decision

Question 1

Summary

The Taxpayer can use the small business 15-year exemption under section 152-110 of the ITAA 1997 to disregard the capital gain that arose from the sale of the Property in 20YY.

Detailed reasoning

The Taxpayer can use the small business 15-year exemption under section 152-110 of the ITAA 1997 to disregard the capital gain that arose from the sale of the Property in 20YY, if all of the following conditions in subsection 152-110(1) of the ITAA 1997 are satisfied:

(a) The basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the capital gain.

(b) The Taxpayer continuously owned the Property (which is a CGT asset as defined in section 108-5 of the ITAA 1997) for the 15 year period ending just before the Property was sold in August 2014.

(c) The Taxpayer 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 it owned the Property.

(d) The individual who was a significant individual of the Taxpayer just before it sold the Property in 20YY was 55 or over at that time, and the event happened in connection with the individual's retirement.

Paragraph 152-110(1)(a) of the ITAA 1997

The basic conditions in Subdivision 152-A of the ITAA 1997, as outlined in subsection 152-10(1) of the ITAA 1997, will be satisfied as follows:

(a) CGT event A1 under section 104-10 of the ITAA 1997 happened when the Taxpayer sold the Property in 20YY.

(b) The sale of the Property (apart from the small business CGT relief in Division 152 of the ITAA 1997) has resulted in a capital gain pursuant to subsection 104-10(4) of the ITAA 1997.

(c) The Taxpayer will have satisfied the maximum net asset value test in section 152-15 of the ITAA 1997, as the Commissioner accepts that the net value of the CGT assets held by it and its affiliates just before 20YY was $X, meaning that the requisite $6,000,000 threshold was not exceeded.

(d) The Property will satisfy the active asset test in section 152-35 of the ITAA 1997, because:

• the Taxpayer owned the property for more than 24 years (i.e. more than the requisite 15 years) from 19XY to 20YY, and

• the property was an active asset (as defined in subsection 152-40(1) of the ITAA 1997) of the Taxpayer's for a total of X years (i.e. at least the requisite 7 ½ years), as it was used at various times in the Taxpayer's multiple businesses from 19XX to June 20XX.

Therefore, the condition at paragraph 152-110(1)(a) of the ITAA 1997 will be satisfied.

Paragraph 152-110(1)(b) of the ITAA 1997

The Taxpayer continuously owned the Property for more than a 24 year period (i.e. more than the requisite 15 year period) ending just before the property was sold in 20YY.

Therefore, the condition at paragraph 152-110(1)(b) of the ITAA 1997 will be satisfied.

Paragraph 152-110(1)(c) of the ITAA 1997

In accordance with section 152-55 of the ITAA 1997, the Shareholder will be a significant individual in the Taxpayer for the periods in which they had a small business participation percentage in the company of at least 20%.

Section 152-65 of the ITAA 1997 provides that the Shareholder's small business participation percentage in the Taxpayer will include their direct small business participation percentage in that company.

For the more than 24 years that the Taxpayer owned the Property:

• the Taxpayer's direct small business participation percentage, and therefore small business participation percentage, was at least 33.33% in the Taxpayer, meaning that the requisite 20% was exceeded, and

• that as a result, the Taxpayer had the Shareholder as a significant individual, which is in excess of the requisite 15 years.

Therefore, the condition at paragraph 152-110(1)(c) of the ITAA 1997 will be satisfied.

Paragraph 152-110(1)(d) of the ITAA 1997

The Shareholder was over 55 before the Property was sold by the Taxpayer in 20YY.

The Commissioner's view on the phrase "in connection with an individual's retirement" is outlined in the Advanced guide to capital gains tax concessions for small business, and can be summarised as follows:

• 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.

• It is not necessary for there to be a permanent and everlasting retirement from the workforce.

• A CGT event may be in connection with an individual's retirement, if it occurred at some time before or after retirement.

Whilst the Shareholder's working hours and duties in the remaining business have greatly reduced since 20XX, the Commissioner is of the view that the sale of the Property in 20YY has no connection with those reductions. This is because the remaining business has been carried on by the Taxpayer at another property since 20XY.

However, the Commissioner accepts that the sale of the Property by the Taxpayer in 20YY is sufficiently connected with:

• the fact that no business was being carried on at the property after the sale and closure of the other businesses as of June 20XX, and

• the Shareholder's retirement from those businesses, resulting from the coinciding cessation of their working hours and duties in those businesses.

Therefore, the condition at paragraph 152-110(1)(d) of the ITAA 1997 will be satisfied.

Question 2

Summary

Any payment by the Taxpayer to the Shareholder within two years after 20YY in relation to the disregarded capital gain will be exempt up to the total amount of that capital gain under section 152-125 of the ITAA 1997.

Detailed reasoning

In accordance with subsection 152-125(1) of the ITAA 1997, section 152-125 of the ITAA 1997 will apply to any payment by the Taxpayer to the Shareholder within two years after 20YY, because:

(a) the capital gain that arose in 20YY will be disregarded by the Taxpayer under section 152-110 of the ITAA 1997, and

(b) the Shareholder was a CGT concession stakeholder of the Taxpayer just before 20YY (as defined in subsection 152-60 of the ITAA 1997), as they were a significant individual of the company at that time (as defined in subsection 152-55 of the ITAA 1997).

As:

• the Shareholder's small business participation percentage in the Taxpayer under section 152-65 of the ITAA 1997 was 100% just before the sale of the Property in 20YY,

• then, in accordance with subsection 152-125(2) of the ITAA 1997, any payment to the Shareholder by the Taxpayer within two years after 20YY in relation to the disregarded capital gain will be exempt up to the total amount (100%) of that capital gain.

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