1013073135388 | Legal database

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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1013073135388

Date of advice: 17 August 2016

Ruling

Subject: Small Business CGT Retirement Exemption

Questions and Answers

1. Are you entitled to the small business retirement exemption?

Yes

2. Are you entitled to the small business retirement exemption in each of years you receive the capital proceeds?

This ruling applies for the following periods

1 July 2016 to 30 June 2017

The scheme commences on

1 July 2016

Relevant facts and circumstances

You and your spouse are significant individuals of the Company.

The Company meets the small business entity and maximum net asset value test.

The Company operates a business.

The Company will enter into a contract to sell the active assets of the business, including the goodwill inherently connected with the business.

The active assets have been used in the business for at least ½ their ownership period.

As consideration for the sale, the Company will receive proceeds payable in X equal instalments over a X year period.

You and your spouse are both over 55 years of age.

Payments from each instalment will be made to each significant individual. Total payments will equal the significant individual's lifetime CGT retirement exemption limit.

A written record of the amount disregarded will be kept.

Assumptions

None

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-15 of the ITAA 1997

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

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

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40.

Further issues for you to consider

None

Reasons for decision

Retirement exemption

You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions.

Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) contains the Small Business Retirement Exemption and provides that a company or a trust can choose to disregard all or part of a capital gain if:

• you satisfy the basic conditions

• you satisfy the significant individual test

• you keep a written record of the amount you choose to disregard (the exempt amount) and, if there are more than one CGT concession stakeholder, each stakeholder's percentage of the exempt amount (one may be nil, but together they must add up to 100%)

• you make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount

• the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and

• where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession (up to the asset's CGT exempt amount).

An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption.

Basic conditions

Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are:

a. a CGT event happens in relation to a CGT asset in an income year,

b. the event would have resulted in the 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 (MNAV) in section 152-15 of the ITAA 1997,

(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, or

(iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.

d. the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

CGT Event

CGT event A1 happens if a taxpayer disposes of a CGT asset. The time of the event is when the taxpayer enters into the contract for the disposal.

In your case, you intend to enter into a contract to sell the active assets of the business, including the goodwill.

Therefore, CGT event A1 will happen when you enter into that contract.

CGT asset

A CGT asset is any kind of property, or a legal or equitable right that is not property. The goodwill is a CGT asset.

Capital Gain

A capital gain or loss is calculated by subtracting the cost base from the capital proceeds.

Capital Proceeds

Capital proceeds are an amount of money or the value of any property you receive (or are entitled to receive) in relation to the CGT event. From the contract you have provided the capital proceeds will be the amount the company is entitled to receive for the disposal of the CGT asset. Even where the proceeds are received in instalments, it is the total amount of all instalments that represents the capital proceeds from the event.

Active asset test

Section 152-35 of the ITAA 1997 states that a CGT asset satisfies the active asset test if:

• 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 test period detailed below, or

• 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 7 ½ years during the test period.

The test period:

• begins when you acquired the asset, and

• ends at the earlier of

• the CGT event, and

• when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

Active Asset

Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.

An intangible asset is an 'active asset' if it is inherently connected with a business that is carried on by you, an affiliate of yours or by another entity that is 'connected with' you.

Therefore the basic conditions have been met.

The other conditions for the retirement exemption are also met as:

• there is at least one significant individual,

• a written record of the amount disregarded will be kept,

• payments from each instalment will be made to the significant individuals, and

• each significant individual's lifetime CGT retirement exemption limit will not be exceeded.

Accordingly, you are entitled to the CGT small business retirement exemption.

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