Edited version of private advice

Authorisation Number: 1051845983443

Date of advice: 2 June 2021

Ruling

Subject: CGT small business 50% reduction

Question 1

Is entity A entitled to the capital gains tax (CGT) small business 50% reduction under subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Did the CGT event happen in the 20XX-XX income year?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

Entity A operated a business from about xxxx.

Entity A carried on a business during the xxxx income years and is a small business entity with a turnover in the relevant income year of less than $2,000,000.

Entity B is the only affiliate or entity connected with entity A.

In or around the calendar year xxxx, entity A entered into discussions and negotiations with entity C to discuss various matters, including the possibility of a sale of the business.

In or around xxxx, entity A agreed in principle to sell its business to entity C, however, the material details and terms in respect of the sale were not finalised.

Various documentation, including a business sale agreement were prepared by the parties to this effect, however none of the initial documentation prepared was formally executed by the parties.

Subsequently, a finalised business sale agreement was formally entered into by the parties, dated xxxx.

Under the agreement, entity A sold its assets and business.

The business was sold by entity A to entity C for a total of $xxxx.

The agreement has the completion date for the Business Sale Agreement as xxxx. Clause xx of the agreement confirms the balance purchase price is being paid in instalments from the completion date and ending xxxx. The first payments began in the xxxx income year prior to the formal execution of the Business Sale Agreement.

The completion date of xxxx remained in the Business Sale Agreement, as the earlier discussions contained much of the material terms of the contract and were sufficient for the parties to treat the transaction as having proceeded on and from the completion date. The discussions were in both email form and oral and the deposit was paid earlier than the execution of the Business Sale Agreement.

Under the agreement, the deposit, being $xxx, was paid by the purchaser to the vendor prior to completion. The deposit was released to the vendor following completion on the completion date. No payments or contractual obligations occurred before xxxx.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Section 328-110

Detailed reasoning

The capital gains tax (CGT) provisions provide some small business relief in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997).

Basic conditions

To qualify for the small business CGT concessions, the basic conditions as contained in subdivision 152-A of the ITAA 1997 must be satisfied.

The basic conditions are:

•         A CGT event happens in relation to a CGT asset of yours in an income year,

•         The event would have resulted in a gain (apart from Division 152),

•         The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

•         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 in section 152-15 of the ITAA 1997,

-      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, or

-      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.

Small business entity

An entity is a CGT small business entity if:

(a) it carries on a business in the current year, and

(b) one or both of the following applies:

(i) it carried on a business in the income year (the previous year) before the current year and its aggregated turnover for the previous year was less than $2m, and

(ii) its aggregated turnover for the current year is likely to be less than $2m (subsections 152-10(1AA) and 328-110(1) of the ITAA 1997).

Aggregated turnover is your annual turnover plus the annual turnovers of any business entities that are your affiliates or that are connected with you.

From the information provided, entity A was carrying on a business in the relevant year and satisfies the aggregated turnover requirement. Therefore, entity A is regarded as a small business entity for Division 152 of the ITAA 1997 purposes.

Active asset test

As outlined in subdivision 152-A of the ITAA 1997, the CGT asset must satisfy the active asset test.

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy 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 test period, or

(b) 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 7½ years during the test period.

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Subsection 152-40(4) of the ITAA 1997 provides some exclusions. None of the exclusions are relevant in your circumstances.

In this case, entity A sold the assets used for its business and satisfies the active asset test.

CGT event

CGT event A1 happens when you dispose of a CGT asset (section 104-10 of the ITAA 1997).

The time of the event is when you enter into the contract for the disposal, or if there is no contract - when the change of ownership occurs.

In this case, the CGT event occurs in the 2018-19 income year.

Small business 50% reduction

It is considered that entity A has satisfied the basic conditions under subsection 152-A of the ITAA 1997.

Under subdivision 152-C of the ITAA 1997, where the basic conditions are satisfied you can apply the 50% small business reduction. There are no further requirements. Therefore, entity A is entitled to apply the 50% small business reduction for the capital gain made on the sale of the CGT assets.

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