Edited version of private advice

Authorisation Number: 1051812717931

Date of advice: 9 March 2021

Ruling

Subject: CGT - extension of time to make a choice

Question

Will the Commissioner allow further time as provided in paragraph 103-25(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) for entity A to choose to apply the small business retirement exemption to the capital gains that arose in the 2019-20 income year?

Answer

Yes, an extension will be granted to xxxx.

This ruling applies for the following period

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commences on

1 July 2019

Relevant facts and circumstances

Entity A (the company) is 100% owned by entity B (the Trust).

The Trust has previously and in the 2019-20 income year allocated 100% of the distributable income to entity C.

Entity C is the sole director of the company and has been the sole beneficiary of the Trust.

Entity D, the spouse of entity C until a recent divorce settlement, was the trustee of the Trust but never participated in the income of the Trust.

The company had previously established and operated a business. The business was sold with settlement occurring on xxxx.

Entity C and entity D were in the midst of separation and divorce proceedings both prior to and subsequent to settlement. This was both distracting and financially constraining on both parties during this period. Consequently, the funds from settlement were placed into trust immediately upon settlement for the sale of the business. The funds were not able to be released until the matrimonial divorce settlement was agreed upon by the parties. Court Orders were signed off by the Family Court and all conditions of those Orders were satisfied to the mutual satisfaction of the parties.

One of the requirements of the Court Orders were that the accounts and tax return for the company for the 2019-20 income year be finalised and tax return lodged. The tax return was subsequently lodged on xxxx. Some funds were released by mutual agreement in order to satisfy debt payments, including ATO liabilities and other non-disputed amounts. However, the final release of funds did not occur until xxxx.

Subsequent to finalising the divorce proceedings and understanding the amount of available funds subsequent to the sale and divorce settlement, entity C decided to contribute an amount to superannuation in respect of his retirement and to protect his wealth position.

The sale of the business was treated as the sale of an active asset and a 50% active asset reduction was applied and disclosed in the 2020 company tax return. At that time, due to the distraction of the divorce proceedings, the lack of control over the funds available from settlement and the urgency with which the company return was required to be prepared and lodged, no further concessions were applied.

Due to the issues and uncertainty surrounding the amount of available funds, no choice was made in relation to the small business retirement exemption.

You wish to amend the company return to include the small business retirement exemption. The amendment will be lodged before xxxx.

Money will be put into the superannuation fund within seven days of making the choice and lodging the company's 2020 amended tax return.

Entity C was under 55 at the time of the CGT event.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 103-25(1)

Income Tax Assessment Act 1997 Subdivision 152-D

Reasons for decision

Small business retirement exemption

Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) contains the requirements for the small business retirement exemption.

The company can choose to disregard all or part of a capital gain under the small business retirement exemption if they satisfy certain conditions. To be entitled to this exemption, the company must meet all the following conditions contained in subsection 152-305(2) of the ITAA 1997:

•   the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied,

•   the company satisfies the significant individual test

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

•   the company must make a payment to at least one of its 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).

Where a CGT concession stakeholder is under 55 years old just before a payment is made in relation to them, the company must make the payment to the CGT concession stakeholder by contributing it to a complying superannuation fund or RSA on their behalf within seven days of making the choice. The company must notify the trustee of the fund or the RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption.

Failure to make the payment by the end of seven days after making the choice into a complying superannuation fund or RSA will mean the conditions are not satisfied and the retirement exemption will not be available.

The amount of the capital gain that is chosen to be disregarded must not exceed the CGT retirement exemption limit. In the case of a company, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment is relevant.

Under section 152-320 of the ITAA 1997, 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.

Under section 152-55 of the ITAA 1997 an individual is a significant individual in a company if they have a small business participation percentage in the trust of at least 20%. This 20% can be made up of direct and indirect percentages.

The company satisfies the significant individual test if it had at least one significant individual just before the CGT event.

Under section 152-60 of the ITAA 1997 an individual is a CGT concession stakeholder of a company if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the trust at that time that is greater than zero.

In this case, we have not fully considered your eligibility for the small business CGT concessions. You should ensure that you satisfy the relevant conditions for the concessions.

Where the company satisfies the basic conditions and the significant individual test and the other above requirements, the company is eligible to apply the small business retirement exemption up to its CGT concession stakeholder/s lifetime limit of $500,000. From the information provided entity C is the company's CGT concession stakeholder.

As the concession stakeholder is under 55 years at the time the company makes the choice the company must make a personal contribution equal to the exempt amount into a complying superannuation fund. The CGT Concession stakeholder must also keep a record of the amount they choose to disregard.

Having considered the specific circumstances and the relevant factors the Commissioner considers it appropriate to grant an extension of time to access the small business retirement exemption.

There would be no prejudice to the Commissioner or unsettling of people by allowing the extension. There has been no mischief involved and the Commissioner considers it fair and equitable in your circumstances to allow further time.

Further issues for you to consider

While the way you lodge your amended return is generally sufficient evidence of making a choice, under Subdivision 152-D of the ITAA 1997, there is a requirement for any choice made under the retirement exemption to be made in writing. You do not need to lodge a copy of this with your return but should keep it for your records.

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