| Disclaimer This edited version has been archived due to the length of time since original publication.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. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051395968452
Date of advice: 6 July 2018
Ruling
Subject: Capital gains tax small business concessions
Does Company A satisfy the basic conditions for small business relief contained in subdivision 152-A of the Income Tax Assessment Act 1997 (“ITAA 1997”)?
Answer
Yes
Question 2
Does Company A satisfy the conditions to utilise the small business CGT 50% reduction contained in subdivision 152-C of the ITAA 1997?
Answer
Yes
Question 3
Do the individual taxpayers meet the requirements of the significant individual test outlined in subdivision 152-A of the ITAA 1997?
Answer
Yes
Question 4
Does Company A satisfy the conditions to utilise the small business CGT retirement exemption contained in subdivision 152-D of the ITAA 1997?
Answer
Yes
Question 5
Does Company A satisfy the conditions to utilise the small business roll-over provision in subdivision 152-E of the ITAA 1997?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 20xx
Year ending 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
1. Company A was incorporated on date X and is 100% owned by a discretionary trust S.
2. Taxpayer X is the sole director and shareholder of the trustee company of trust S.
3. Company A sells goods.
4. Company A entered into a sale agreement to sell its business assets on date X to an unrelated company.
5. The business assets were sold for US$X which included US$X for inventory.
6. 85% of the purchase price was paid on date X in 2017. Of the balance, 5% will be payable on date X in 2018 and the remaining 10% on date x in 2020.
7. The USD/AUD exchange rate on date X was ?.
8. Company A advised that they are under the $6m maximum net asset value test.
9. Company A advised that there are two individuals who would like to access the retirement exemption:
a. Taxpayer B - Age over 55
b. Taxpayer C – Age over 55
10. Company A advised there would be at least one significant individual for the financial year ending 30 June 2018, 30 June 2019 and 30 June 2020.
Information provided
11. You have provided information in a number of documents and phone conversations in relation to the Product, including:
a. your private ruling application.
b. supplementary information provided.
12. We have referred to the relevant information within these documents and conversations in applying the relevant tests to your circumstances.
Relevant legislative provisions
Income Tax Assessment Act 1997, section 6-5
Income Tax Assessment Act 1997, section 152-A
Income Tax Assessment Act 1997, section 152-C
Income Tax Assessment Act 1997, section 152-D
Income Tax Assessment Act 1997, section 152-E
Income Tax Assessment Act 1997, section 104-10
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 152-50
Income Tax Assessment Act 1997, section 152-55
Income Tax Assessment Act 1997, section 152-60
Income Tax Assessment Act 1997, section 152-70
Income Tax Assessment Act 1997, section 152-75
Income Tax Assessment Act 1997, section 152-205
Income Tax Assessment Act 1997, section 152-300
Income Tax Assessment Act 1997, section 152-305
Income Tax Assessment Act 1997, section 152-310
Income Tax Assessment Act 1997, section 152-315
Income Tax Assessment Act 1997, section 152-325
Income Tax Assessment Act 1997, section 152-410
Income Tax Assessment Act 1997, section 328-110
Income Tax Assessment Act 1997, section 328-115
Income Tax Assessment Act 1997, section 328-125
Income Tax Assessment Act 1997, section 328-130
Reasons for decision
All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.
Summary
Company A can apply the following CGT Small Business Concessions (SBC) associated with the disposal of the goodwill of the company under section 152-C, 152-D and 152-E of the ITAA 1997 because at the time of the disposal the basic conditions for accessing the small business CGT concessions were met:
● a CGT event happened in relation to the sale of the assets (goodwill) of the business, which was a CGT asset of Company A
● this event would (apart from Division 152) have resulted in a capital gain for Company A
● the goodwill of the business was an active asset, and
● the maximum net asset value test, as it applies to Company A was satisfied.
Detailed reasoning
Disposal of property – time of CGT event A1
1. Capital gains tax (CGT) event A1 happens if you dispose of a CGT asset (section 104-10. Subsection 104-10(3) provides that the time of the event is when you enter into the contract for disposal or if there is no contract when the change of ownership occurs.
2. On date X Company A entered into an agreement for the sale of the assets of the business. This disposal means that CGT event A1 happened on date X in 20xx. Company A made a capital gain in the 20xx-xx financial year as a result of the sale of the business assets.
Eligibility for the CGT SBC
3. An entity may choose to apply a CGT SBC in Division 152 to reduce or disregard a capital gain if the basic conditions set out in Subdivision 152-A are satisfied.
4. Subsection 152-10(1) provides the basic conditions 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 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;
iii. 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;
iv. The conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;
d. The CGT asset satisfies the active asset test (see section 152-35).
Small business entity
5. The term ‘small business entity’ has the meaning given by Subsection 328-110(1) which states:
You are a small business entity for an income year (the current year) if:
a. You carry on a business in the current year; and
b. One or both of the following applies:
i. You carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $2 million, and
ii. Your aggregated turnover for the current year is likely to be less than $2 million
6. The term ‘aggregated turnover’ is defined in section 328-115 as the annual turnover of a business plus the annual turnovers of any businesses it is connected with or affiliated with. An entity's aggregated turnover is the same as its annual turnover if there are no other entities it is connected with or affiliated with.
7. Subsection 328-120(1) defines an entity's annual turnover for an income year as the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.
8. ‘Ordinary income’ is defined in section 6-5 as income according to ordinary concepts. An entity's annual turnover therefore includes all income according to ordinary concepts derived in the ordinary course of carrying on a business.
9. Company A’s aggregated turnover for the 20xx-xx financial year was in excess of $2 million. It is likely that the Company A’s aggregated turnover will be more than $2 million for the 20xx-xx financial year.
10. Company A is not a small business entity for the purpose of paragraph 152-10(1)(c)(i).
Maximum Net Asset Test
11. Section 152-15 states that you satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000:
a. the net value of the CGT assets of yours;
b. the net value of the CGT assets of any entities connected with you;
c. the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).
12. Section 328-125 provides that an entity is connected with another entity if one of the entities controls the other entity, or if the two entities are controlled by the same third entity.
13. Under paragraph 328-125(2)(b), control of a company will be established if an entity alone or together with affiliates beneficially own, or has the right to acquire beneficial ownership of, interests in the company with at least 40% of the voting power in the company.
14. The Trustee Company of trust S holds 100% of the shares in Company A and has control of 100% of the voting power and has the right to receive 100% of any distribution of income or capital from the company. Trust S is therefore connected to Company A in accordance with section 328-125.
15. Subsection 328-125(3) states:
An entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates, or the first entity together with its affiliates.
16. Taxpayer X is the sole director and shareholder of the Trustee Company. As Taxpayer X has control of the trustee company he would also have control of the Trust S.
17. Subsection 328-130(1) defines an affiliate as an individual or company which acts or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the business of the individual or company.
18. Taxpayer B, being the parent of Taxpayer X is not an affiliate of Company A.
19. Taxpayer C, being the parent of Taxpayer X is not an affiliate of Company A.
20. Company A has told us that:
a. there are no other connected entities with the Company
b. there are no affiliates of the Company
21. Therefore, under section 152-15 the assets of Trust S, Company A and Taxpayer X must be taken into account for the purposes of determining the maximum net asset value of Company A.
22. Based upon the facts provided by you the net value of the assets of Company A, Trust S and Taxpayer X, just prior to the disposal of the business assets were less than $6 million.
23. It is accepted that at the time of the disposal of the business assets Company A meets the maximum net asset test and therefore the condition set out in paragraph 152-10(1)(c) is satisfied.
Active asset test
24. A CGT asset is an active asset at a given time if, at that time you:
a. Own the asset (whether tangible or intangible) and it is used, or held ready for use in the course of carrying on a business (whether alone or in partnership) by you, an affiliate of yours or an entity connected with you
25. Subsection 152-35(1) provides that a CGT asset satisfies the active asset test if:
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 of ownership 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 for at least 7.5 years during the period specified in subsection (2).
26. Company A started trading in 20xx and has operated its business continuously since that time. The goodwill is an active asset of the company.
Conclusion basic conditions
27. Based on the facts provided by the taxpayer the gain on the sale of the goodwill satisfies the basic conditions in Subdivision 152-A.
Subdivision 152-C – Small business 50% reduction
28. Under section 152-205 a taxpayer may further reduce the amount of a capital gain remaining after applying step 3 of the method statement in subsection 102-5(1) by 50% if the basic conditions in Subdivision 152-A are satisfied for the gain.
29. Company A passes the basic conditions for subdivision 152-A so is eligible to apply the 50% active asset reduction to the capital gain.
Subdivision 152-D Small business retirement exemption
30. Under the retirement exemption in Subdivision 152-D, 152-D a taxpayer may choose to disregard all, or part of, a capital gain if the capital proceeds from the CGT event are used in connection with retirement and the basic conditions in Subdivision 152-A are satisfied.
There is a lifetime limit of $500,000 for all such choices in respect of an individual and there are two additional conditions that must be satisfied if the CGT asset is a share in a company or an interest in a trust. These are:
(1) the company or trust must satisfy the significant individual test (section 152-50), and
(2) the individual claiming the concession must be a CGT concession stakeholder in the company or trust.
31. Section 152-50 states that an entity satisfies the significant individual test if the entity had at least one significant individual just before the CGT event.
32. In accordance with section 152-55 an individual is a significant individual in a company if they have a ‘small business participation percentage’ in the company of at least 20%.
33. Section 152-70 describes the direct small business participation percentage. As the trust owns 100% of shares in Company A and is entitled to any dividends that they may pay the trust has a small business percentage of 100% in Company A.
34. Taxpayer B received a X% distribution of the income and Taxpayer C received a distribution of X% of the income of Trust S.
35. Under section 152-70(1)(3) Taxpayer B &C have a direct small business participation percentage in Trust S in the 2017 financial year.
36. However, to determine if Company A has a significant individual the indirect small business participation percentage needs to be applied.
37. Section 152-75(1) states to work out the indirect small business participation percentage that an entity (the holding entity) holds at a particular time in another entity (the test entity) by multiplying:
a. The holding entity’s direct small business participation percentage (if any) in another entity (the intermediate entity) at that time; by
b. The sum of:
i. The intermediate entity’s direct small business participation percentage (if any) in the test entity at that time; and
ii. The intermediate entity’s indirect small business participation percentage (if any) in the test entity at that time (as worked out under one or more other applications of this section).
38. Taxpayer B has a small business participation of X% in the trust. The trust has a small business percentage in Company A of 100%. To determine Taxpayer B’s indirect small business percentage these two amounts are multiplied. Taxpayer B has an indirect small business percentage in Company A of X%.
39. Taxpayer C has a small business participation of X% in the trust. The trust has a small business percentage in Company A of 100%. To determine Taxpayer C’s indirect small business percentage these two amounts are multiplied. Taxpayer C has an indirect small business percentage in Company A of X%.
40. Company A has confirmed that there will be at least one significant individual in the 20xx, 20xx and 20xx financial years.
41. Subsection 152-325(1) requires a company or trust to make a payment to at least one of its CGT concession stakeholders if the company or trust receives an amount of capital proceeds from a CGT event for which it makes a choice under Subdivision 152-D.
42. Paragraph (a) of the definition of CGT concession stakeholder in section 152-60 states a significant individual in a company or trust is a CGT concessional stakeholder.
43. Section 152-310 states that a choice has to be made by the individual, company or trust for the CGT exempt amount to be disregarded.
44. According to section 152-300, you can choose to disregard a capital gain from a CGT event happening to a CGT asset of your small business if the capital proceeds from the event are used in connection with the retirement of your significant individuals and there is a lifetime limit of $500,000 for all choices in respect to each individual.
45. According to section 152-315 where the taxpayer is a company the amount chosen cannot exceed the CGT retirement exemption limit for each individual for who the choice is made.
46. Company A stated that the choice to apply the retirement exemption and to make the payments to the individuals will be made prior to, or on the day of lodgement of the income tax return for the year ended 30 June 20xx.
47. Company A has confirmed that both Taxpayer B and Taxpayer C will each receive a retirement payment of $XXX to be used in connection with their retirement.
48. As Company A satisfies all the conditions, Taxpayer B and Taxpayer C are each entitled to the retirement exemption under Subdivision 152-D
Subdivision 152-E Small business rollover exemption
49. Section 152-410 states you can choose to obtain a roll-over under this Subdivision for a capital gain if the basic conditions in Subdivision 152-A are satisfied.
50. Company A passes the basic conditions for subdivision 152-A so is eligible to obtain the Small business roll-over.
Conclusion
51. Based on the facts you have provided, the conditions contained in Division 152 are met. Therefore, Company A is eligible for CGT relief under Subdivision 152-C, Subdivision 152-D and Subdivision 152-E to reduce or disregard the capital gain made on the disposal of its business assets on 16 November 20xx.
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
