Edited version of your written advice

Authorisation Number: 1051203452314

Ruling

Subject: Capital gain tax - small business concessions - 15-year exemption

Question:

Are you eligible for the capital gains tax small business 15-year exemption in relation to the disposal of the property in the 20XX-YY income year under Subdivision 152-B of the Income Tax Assessment Act 1997?

Answer:

Yes.

This ruling applies for the following periods

Income year ending 30 June 20YY.

The scheme commences on

Income year ending 30 June 20XX.

Relevant facts and circumstances

After 20 September 1985 you were incorporated with Person A and Person B being your shareholders.

Around the time you were incorporated, Person A and Person B commenced operating a business at the property (the Property).

Person A and Person B's child (Person C) worked with them in the business.

Person A controlled all of the financial affairs, including their and Person B's personal affairs and your financial affairs.

Due to their age, Persons A and B were seeking to wind down their involvement in the business and they decided to purchase the Property.

A number of years after Persons A and B had commenced operating their business at the Property, you purchased the Property. Persons A and B continued to operate their business at the Property after you purchased it.

Over a year after you had purchased the Property, Person C incorporated a company (Company A) of which they are the director and shareholder.

Around the time that Company A was incorporated, Persons A and B's business was transferred to Company A.

Person A continued to work in the business for a number of years after it was transferred to Company A, being involved with the business, banking, cash handling, business coaching, renovating and painting the Property and other activities relating to the business.

Person B continued to work in the business at reduced hours for a number of years after the transition of the business from you to Company A. During that period Person B was involved in various aspects of the business.

Person B continued having regular meetings with Person C until just prior to the Property being sold.

The rent paid by Company A for the Property was paid under an informal arrangement, with no lease documents being prepared. There were periods when there was no rent received from Company A due to the business being closed, or discounted rent was paid at Person A and/or Person B's discretion.

The rent payments were controlled by Persons A and B who would determine the amount of rent that Company A would pay at their discretion.

Person A passed away a number of years after the business was transferred to Company A and Person B became your sole director and shareholder.

A number of years after Person A passed away; there was a breakdown of the relationship between Person B and Person C.

The Property was put on the market as premises only and the relevant business operated by Company A at the Property ceased.

You sold the Property as vacant property with Goods and Services Tax (GST) remitted on the sale shortly after Company A had ceased operating the business from the Property.

The Property is the only property you own.

The net value of the assets of you and your affiliates and connected entities is well below $6million at the time the Property was sold.

The combined aggregated turnover of you and Company A was well below $2 million.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Reasons for decision

15-year exemption for companies

The rules covering the small business 15-year exemption are contained in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997).

If you qualify for the small business 15-year exemption you can entirely disregard the capital gain you make from the disposal of a capital gains tax (CGT) asset and do not need to apply any other concessions. In addition, you do not have to apply capital losses against your capital gain before applying the exemption.

Under section 152-110 of the ITAA 1997 a company can disregard the capital gain made on the disposal of a CGT asset if the company: 

(a) satisfies the basic conditions for the small business CGT concessions in Subdivision 152-A of the ITAA 1997 for the gain

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

(c) had a significant individual for a total of at least 15 years (even if it was not the same significant individual during the whole period) during which the company owned the CGT asset, and

(d) an individual who was a significant individual of the company just before the CGT event either:

(i) was 55 or over at that time and the event happens in connection with the individual's retirement, or

(ii) was permanently incapacitated at that time.

Basic conditions

The basic conditions for the small business CGT concessions contained in section 152-10 of the ITAA 1997 are as follows:

(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) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997; and

(d) at least one of the following applies;

● you are a small business entity for the income year;

● you satisfy the maximum net asset value test;

● you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

● you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (passively held assets as outlined in subsection 152-10(1A) of the ITAA 1997).

Significant individual

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.

In connection with retirement

The Explanatory Memorandum (EM) to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession: 

1.68 One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement. 

The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with a taxpayer's retirement', nor does it give any indication of the degree of retirement required in order to take advantage of this concession. It could be argued that the phrase 'in connection with retirement' means that the capital gain arising from the disposal of active assets is to be used to provide funds for a person's retirement rather than to precipitate retirement at the time of the CGT event. The words used in the EM support this interpretation.

The Advanced guide to capital gains tax concessions for small business 2013-14 also supports this view. It makes it clear that it is not necessary for there to be a permanent and everlasting retirement from the workforce. However, there would need to be at least a significant reduction in the number of hours worked or a significant change in the nature of the activities to be regarded as a retirement for the purposes of paragraphs 152-105(d) or 152-110(1)(d) of the ITAA 1997.

Application to your situation

In your case, the basic conditions contained in Subdivision 152-A of the ITAA 1997 will be satisfied because:

● a CGT event occurred when you dispose of the Property;

● the sale of the Property resulted in a capital gain;

● the Property was used by Persons A and B in relation to their business for a number of years and then by Company A in relation to its business for over 15 years

● you and Company A were both small business entities who had a combined aggregated turnover being well below $2 million

● the net value of the assets of you and your affiliates and connected entities is well below $6million at the time the Property was sold.

● you owned the Property for a period of more than 15 years.

In addition,

● you will have continuously owned the Property for a period of more than 15 years

● you have had a significant individual for a total of at least 15 years during which you have owned the Property, and

● your significant individual just before you disposed of the Property was over 55 years of age and the disposal of the Property will happen in connection with their retirement.

Therefore, you qualify for the small business 15-year exemption in section 152-110 of the ITAA 1997 in relation to the Property. Consequently, you can disregard the capital gain you make on its disposal.

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