Edited version of private advice

Authorisation Number: 1051955355755

Date of advice: 17 March 2022

Ruling

Subject: CGT small business concessions

Question 1

Does ABC Pty Ltd meet the basic conditions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply the small business capital gains tax (CGT) concessions?

Answer

Yes.

Question 2

Does ABC Pty Ltd meet the conditions under Subdivision 152-D of the ITAA 1997 to apply the small business retirement exemption?

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

S (S) was the sole director of ABC Pty Ltd (ABC).

ABC previously DEF Pty Ltd was established on XX XXXary 20XX.

In 20XX, S replaced herself with G (G) due to a medical condition.

In 20XX, D (D), also become a director of ABC.

GHI Pty Ltd as trustee for the JKL (JKL), a discretionary trust is the sole shareholder of ABC.

S received XXX% of the distributions from JKL in the 20XX income year.

G and D are now the appointers of JKL, and D is secretary of the trustee.

Both G and D are xxx and full time employees of unrelated businesses. They do not have any other related entities.

ABC manufactured items to sell to third party wholesalers. G and D did not have any involvement in the operations of ABC and only assisted S with preparation and lodgment of periodic Business Activity Statements, payment of superannuation and similar accounting matters. G and D were never remunerated for this assistance.

The business was sold on XX XXXber 20XX. ABC executed an agreement to sell the business assets including goodwill to an unrelated third party XYZ Pty Ltd (XYZ).

The total purchase price of the sale was $XXX,XXX comprising $XX,XXX for plant and equipment and the balance of $XXX,XXX being allocated to goodwill.

The proceeds are being paid on deferred terms with the final instalment being paid in XXXber 20XX.

In all income years of trading ABC's turnover was less than $XX million.

ABC retained no other assets at the Business Sale Date, apart from a small amount of cash at bank and superannuation liabilities.

S has never utilised any CGT small business relief concessions.

S was born in 19XX.

ABC intends to contribute up to or equal to the value of the capital gain of $XXX,XXX to S's superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

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 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 152-65

Income Tax Assessment Act 1997 section 152-70

Income Tax Assessment Act 1997 section 152-75

Income Tax Assessment Act 1997 section 152-305

Reasons for decision

Basic conditions

Section 152-10 of the ITAA 1997 contains the basic conditions that must be satisfied to be eligible to apply the CGT small business concessions. These conditions are:

(a) a CGT event happens in relation to a CGT asset in an income year.

(b) the event would (apart from this Division) 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 in section 152-15 of the ITAA 1997

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or

(iv) 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.

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

Small Business Entity

Section 152-10 of the ITAA 1997 states a small business entity is:

•         carrying on a business, and

•         has an aggregated turnover of less than $2 million.

Active Asset Test

Section 152-35 of the ITAA 1997 states that a CGT asset satisfies the active asset test if you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate or another entity that is connected with you if:

•         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 owned; or

•         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 7.5 years.

Section 152-40 of the ITAA 1997 explains the meaning of an active asset. A CGT asset is an active asset at a time if, at that time:

You own the asset, and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, your affiliate or another entity that is connected with you or if the asset is intangible asset, you own it and it is inherently connected with a business that is carried on by you, your affiliate, or another entity that is connected with you.

Retirement Exemption

Subsection 152-305(2) of the ITAA 1997 provides that a company or trust can disregard any capital gain arising if:

(a) the basic conditions are satisfied;

(b) the significant individual test is satisfied under section 152-50 of the ITAA 1997;

(c) the company or trust conditions in section 152-325 of the ITAA 1997 are satisfied.

Significant Individual

Section 152-50 of the ITAA 1997 provides that an entity satisfies the significant individual test if the entity had a least one significant individual just before the CGT event. 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% (section 152-55 of the ITAA 1997). The 20% can be made up of direct or indirect percentages.

Subsection 152-70(1) of the ITAA 1997 provides that an entity holds a direct small business participation percentage at the relevant time in an entity equal to the percentage worked out as below:

An entity's direct small business participation percentage in a company is the percentage of:

•         voting power that the entity is entitled to exercise,

•         any dividend payment that the entity is entitled to receive, or

•         any capital distribution that the entity is entitled to receive, or

•         if they are different, the smallest of the three percentages above.

All classes of shares are taken into account in determining an entity's participation percentage in a company.

An indirect small business participation percentage in a company or a trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity, and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.

Company Requirements

Section 152-325 of the ITAA 1997 provides that a company or trust must further satisfy the following conditions in order to be eligible to disregard all or part of a capital gain:

•         you keep a written record of the amount you choose to disregard (the exempt amount) and, if there is more than one CGT concession stakeholder, each stakeholder's percentage of the exempt amount,

•         you make a payment to at least one of your 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).

You must make payments if you choose the retirement exemption for an event 7 days after you choose to disregard the capital gain or seven days and seven days after you receive the capital proceeds from the CGT event.

If 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 retirement savings account (RSA) on their behalf. The company must notify the trustee of the fund or RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption.

There is no requirement to make this contribution if the stakeholder was 55 years old or older.

Application to your circumstances

Upon disposal of the business, CGT event A1 occurred which resulted in a capital gain. ABC is a small business entity that has a turnover of less than $XX million in the relevant income years. The active asset test has been satisfied therefore ABC satisfies the basic conditions under section 152-10 of the ITAA 1997 to apply the small business concessions.

Retirement exemption

S received 100% of the distributions from the trust in the 20XX income year and the trust is the sole shareholder of ABC. Therefore S has a small business participation percentage in ABC of 100% and is a significant individual for the relevant year.

S has not utilised the CGT small business retirement exemption previously and therefore has a lifetime limit of $500,000 under section 152-320 of the ITAA 1997. ABC is entitled to apply the small business CGT retirement exemption under section 152-305 of the ITAA 1997 as the basic conditions and additional company conditions have been satisfied. ABC must keep a written record of the amount disregarded under the small business retirement exemption.

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