Disclaimer
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 private advice

Authorisation Number: 1052110338557

Date of advice:21 April 2023

Ruling

Subject: CGT - small business concessions

Question 1

Does the Company satisfy the requirements in section 152-110 of the Income Tax Assessment Act 1997 to apply the 15-year exemption to disregard the capital gain made on the sale of the Property?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

The Company

1.            The Company is incorporated.

2.            The shares in the Company are held by Individual A and Individual B

3.            The directors of the Company are Individual A and Individual B.

Individual A and Individual B

4.            Individual A is over the age of 55.

5.            Individual B is over the age of 55.

6.            Individual A is employed by the Family Trust.

7.            Individual A is looking to retire.

8.            Child One has been identified to take over from Individual A and be employed by the Family Trust.

The Family Trust

9.            The trustee of the Family Trust is the Other Company.

10.          The directors of the Other Company are Individual A, Individual B and Child One.

11.          The Family Trust is a small business entity.

The Property

12.          The Company holds Property used in the business operation of the Family Trust.

13.          The Property has been owned by the Company for more than 15 years.

Disposal of the Blocks

14.          With Individual A's pending retirement, the Property held by the Company is to be disposed of.

15.          The Company intends to dispose of the Property to the Property Trust.

16.          Contracts for the disposal of the Property are proposed to be signed in the financial year ending 30 June 20xx.

17.          The disposal of the Property will be at market value.

18.          The market valuations will be prepared by a qualified valuer.

19.          The Company will provide the proceeds from the disposal of the Property to Individual A.

20.          Individual A will be removed as a director of the Other Company.

21.          Individual A will no longer receive wages from the Family Trust.

22.          Upon the disposal of the Property, the Company will satisfy the basic conditions in section 152-10 of the Income Tax Assessment Act 1997.

The Property Trust

23.          The beneficiaries of the Property Trust are limited to the individuals of the 'designated person's' family.

24.          Individual A will be the designated person.

25.          The Property Trust is a non-fixed trusts for tax purposes.

Trust Distributions

26.          The Property Trust may derive rental income as the land holders.

27.          Income from the Property Trust may be distributed to eligible beneficiaries.

28.          Individual A may receive a distribution of this income, where the directors of the trustee company resolve to do so.

29.          The Family Trust will derive income from business activities.

30.          Income from the Family Trust may be distributed to eligible beneficiaries.

31.          Individual A may receive a distribution of this income, where the directors of the trustee company resolve to do so.

Relevant legislative provisions

Income Tax Assessment Act 1997

subdivision 152-B

section 152-10

section 152-55

section 152-65

subsection 152-70(1)

subsection 152-110

subsection 152-110(1)

paragraph 152-110(1)(a)

paragraph 152-110(1)(b)

paragraph 152-110(1)(c)

paragraph 152-110(1)(d)

Reasons for decision

All references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Summary

The basic conditions in Subdivision 152-A of the ITAA 1997 have been satisfied.

The conditions in subsection 152-110(1) of the ITAA 1997 have also been met:

Therefore, the company can choose to apply the 15-year exemption and disregard any capital gain made in relation to the disposal of the Blocks.

Detailed reasoning

1.            Subdivision 152-B outlines the conditions that need to be met for a capital gain to be disregarded under the small business 15-year exemption.

2.            Under subsection 152-110(1), an entity that is a company can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a)  the basic conditions in Subdivision 152-A are satisfied for the gain,

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

(c)   the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset:

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

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

(ii)    was permanently incapacitated at that time.

3.            A significant individual is defined in section 152-55 as an individual who has a small business participation percentage in the company of at least 20%.

4.            An individual's small business participation percentage is worked out in accordance with section 152-65 and is the sum of the individual's direct and indirect small business participation percentage.

5.            Section 152-70(1) provides that an individual's direct small business participation percentage in a company is the least of the following percentages:

(a)       the percentage of voting power in the company; or

(b)       the percentage of any dividend that the company may pay; or

(c)       the percentage of any distribution of capital that the company may make.

6.            Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. A CGT event may be in connection with an individual's retirement even if it occurs at some time before retirement.

7.            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.

8.            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.

9.            The phrase 'in connection with retirement' infers 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.

10.          There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it isn't necessary for there to be a permanent and everlasting retirement from the workforce.

In the Company's circumstances

Basic conditions

11.          The Commissioner considers that, upon the disposal of the Property, the basic conditions in section 152-10 will be satisfied for the gain made by the Company on that disposal.

12.          Paragraph 152-110(1)(a) is satisfied.

15-year ownership period

13.          The Company continuously owned the Property for the 15-year period ending just before the CGT event, being the disposal of the Property.

14.          Paragraph 152-110(1)(b) is satisfied.

Significant individual

15.          The Company had a significant individual for a total of more than 15 years of the time during which the Company owned the Property.

16.          Paragraph 152-110(1)(c) is satisfied.

In connection with retirement

17.          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. Accordingly, whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case.

18.          Following the disposals of the Property, the capital proceeds will flow through to Individual A and will provide funding for their retirement.

19.          Additionally, there will be a significant reduction in the number of hours worked by Individual A. After the disposal of the Property, Individual A's involvement in the Family Trust's activities will cease. The business activities that Individual A currently undertakes will be conducted by Child One.

20.          The Commissioner considers there is a clear link between the disposal of the Property and Individual A's retirement. It is considered that the disposal of the Property is integral to their retirement plans.

21.          Paragraph 152-110(1)(d) is satisfied.

Conclusion

22.          The Company can choose to apply the 15-year exemption and disregard any capital gain made in relation to the disposal of the Property.

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).