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Edited version of your written advice
Authorisation Number: 1013127505212
Date of advice: 21 November 2016
Ruling
Subject: Capital gains tax
Question 1
Is the company entitled to apply a 15-year exemption under section 152-110 of the Income Tax Assessment Act 1997 to the capital gain arising from the sale of the property?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 20ZZ
The scheme commences on:
1 July 20YY
Relevant facts and circumstances
In 19XX the company purchased the property.
In 20ZZ the company sold the property.
The company is a small business entity.
The property was used in the course of carrying on the company's business for the entire ownership period.
There were two significant individuals in the company since 19XX. The significant individuals were over 55 years old at the time of the sale of the property which occurred in connection with their retirement.
Relevant legislative provisions
Income Tax Assessment Act 1997 subdivision 152-A
Income Tax Assessment Act 1997 subdivision 152-B
Income Tax Assessment Act 1997 section 152-110
Income Tax Assessment Act 1997 section 152-35
Income Tax Assessment Act 1997 section 152-40
Reasons for decision
Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) provides a small business 15-year exemption as part of the CGT small business relief provisions. If you qualify for the small business 15-year exemption, the capital gain is entirely disregarded.
Under section 152-110 of the ITAA 1997, you can disregard any capital gain arising from the disposal of your property if all of the following conditions are satisfied:
(a) the basic conditions in subdivision 152-A of the ITAA 1997 are satisfied for the gain
(b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event
(c) you had a significant individual for a total of at least 15 years during the period of ownership of the CGT asset and
(d) an individual who was a significant individual of yours just before the CGT event was:
(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.
The basic conditions for the small business capital gains tax concessions in subdivision 152-A of the ITAA 1997 (as relevant to this case) are:
● the small business entity test and
● the active asset test.
Small business entity
You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover of less than $2 million.
Active asset test
A requirement of the active asset test contained in section 152-35 of the ITAA 1997 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business had ceased to be carried on in the 12 months before the CGT event.
The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.
Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you.
Application to your circumstances
The company is a small business entity and satisfies the active asset test, as the property was used in the course of carrying on the business for the entire ownership period, meeting the conditions in subdivision 152-A of the ITAA 1997.
The company has held the property for over 20 years, with a significant individual for the entire ownership period. The significant individuals of the company just before the sale of the property were over 55 years old and the sale happened in connection with their retirement.
The conditions of section 152-110 of the ITAA 1997 are satisfied, therefore the company is entitled to apply a 15-year exemption, and disregard any capital gains from the sale of the property.
Additional information
If a capital gain made by a company is disregarded under the small business 15 year exemption, the company must make a payment within two years after the CGT event that resulted in the capital gain or, in appropriate circumstances, such further times as allowed by the Commissioner. More information regarding the small business concessions and the 15 year exemption can be found in the publication Advanced guide to capital gains tax concessions for small business which is available on our website www.ato.gov.au.
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