Edited version of private ruling

Authorisation Number: 1011591970481

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains small business 15-year exemption

Question 1

Will the small business 15-year exemption in section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to allow you to disregard any capital gain from the sale of your business premises property?

Answer:

Yes.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commenced on

1 July 2010.

Relevant facts

The sole surviving shareholder is over seventy years of age.

He is the only individual who will receive the net capital gain from the sale of the business premises.

He is an employee (director) as well as a shareholder.

He will reduce his hours of work per week, once the asset is sold.

He will eventually retire.

The other shareholders died.

The property was acquired after 20 September 1985.

This property is where all the company decisions are made, that is, this is the company's central place of management. This is the company's principle place of business or business office and all records are stored there.

The business has been trading for a long period.

This property is now placed on the market for sale.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-10(1)

Income Tax Assessment Act 1997 Subsection 104-10(3)

Income Tax Assessment Act 1997 Subsection 104-10(4)

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Paragraph 152-35(a)

Income Tax Assessment Act 1997 Paragraph 152-35(b)

Income Tax Assessment Act 1997 Section 152-40

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 152-100

Income Tax Assessment Act 1997 Section 152-110

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 152-105

Reasons for decision

Issue 1

Question 1

Summary

The condition for the 15-year active asset exemption has been fulfilled and therefore the capital gain from the sale of the business premises will not be subject to income tax.

Detailed reasoning

Income tax is paid at your marginal rates of tax on certain capital gains you make. You make a capital gain or a capital loss as a result of a capital gains event.

The most common event (CGT event A1 in section 104-10 of the ITAA) happens if you dispose of a CGT asset acquired on or after 20 November 1985. In your case, CGT event A1 will happen when the business premises that was acquired after 19 September 1985 is disposed of.

Division 152 of the ITAA 1997 contains four CGT concessions, which are available to small businesses if a capital gain is made as a result of a CGT event that happened after 21 September 1999. These concessions may exempt or reduce a capital gain.

Subdivision 152-B of the ITAA 1997 provides a small business 15-year exemption as part of the capital gains tax (CGT) small business relief provisions. If you qualify for the small business 15-year exemption, the capital gain is entirely disregarded and it is unnecessary to apply any further concessions.

Under section 152-110 of the ITAA 1997, a company or trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

1. The basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain

2. The entity continuously owned the CGT asset for the 15 year period ending just before the CGT event

3. At all times during the whole period for which the entity owned the asset, the entity had a significant individual (even if it was not the same significant individual during the whole period), and

4. 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.

Condition 1 (basic condition)

Paragraph 152-110(1)(a) of the ITAA requires that the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain.

Subsection 152-10(1) of the ITAA 1997 contains the basic conditions for small business relief in relation to capital gains. The basic conditions to be satisfied for the gain are:

a) a CGT event happens in relation to a CGT asset of yours in an income year. This condition does not apply in the case of CGT event D1

b) the event would (apart from Division 152 of the ITAA 1997) have resulted in a capital gain

c) you are a small business entity or you satisfy the maximum net asset value test in section 152-15 of the ITAA and

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

Basic condition (a) CGT event occurs

This condition requires a CGT event (other than CGT event D1 or K1) to happen in relation to your CGT asset in an income year.

The business premises will be sold and CGT event AI will occur. Therefore, this condition will be satisfied.

Basic condition (b) capital gain occurs

The CGT event AI will result in a capital gain. The property was acquired after 19 September 1985. Therefore, this basic condition will be satisfied.

Basic condition (c) small business entity

The conditions of a small business entity are set out in section 328-110 of the ITAA 1997.

The company is carrying on a business in the 2010-11 income tax year.

The company carried on a business in the previous income year and the gross turnover is less than $2million. Therefore, this basic condition is satisfied.

Basic condition (d) Active asset test

This condition requires that the active asset test in section 152-35 of the ITAA 1997 be satisfied.

A requirement of the active asset test in paragraph 152-35(a) of the ITAA 1997 is that the CGT asset was an active asset just before the CGT event.

The date of sale will be the date the purchaser enters into a sale and purchase contract. The business will not be closed immediately and the sole beneficiary of this capital gain will work reduced hours per week.

The business premises is for the purposes of making decisions for the company and storing documents and records. The main purpose of the business premises is not to derive rental income therefore the business premises is an active asset, in accordance with the meaning of active asset in section 152-40 0f the ITAA 1997.

The basic conditions (condition 1) have been satisfied. Three more conditions (2, 3 and 4) have to be satisfied, before the capital gain made from the sale of the business premises will be exempt from income tax under subdivision 152B of the ITAA 1997.

Condition 2 (15-year active asset)

To date the company has held this property that was acquired after 19 September 1985. Therefore, you satisfy this condition as more than 15 years since you acquired this real property and used it in carrying on your business activities.

Condition 3 (Significant individual)

Section 152-55 of the ITAA 1997 explains the meaning of a significant individual to mean the individual has a 'small business participation percentage' in the company of at least 20 percent.

Small business participation percentage is the direct and indirect small business participation percentages (section 152-65 of the ITAA 1997).

The direct small business participation percentage needs calculation, as there are no linked entities related to the individual or company.

The direct small business participation percentage is calculated in accordance with section 152-70 of the ITAA 1997.

The percentage that the individual has is calculated using their shareholding in the company. The percentage is calculated by comparing the smallest percentage if there is a difference between the percentage of the voting power in the company or any dividends that the company may pay or the any capital distribution that the company may make to the individual.

The person receiving the capital gain has all the voting, dividend and capital distribution rights and therefore he is the significant individual. This condition is satisfied.

Condition 4 (CGT event A1 occurs due to retirement of the significant individual)

However, he is selling the business premises to wind up the business and go into retirement.

He is over XX years of age, reducing his hours of work per week. This condition is satisfied.

Summary

All the conditions set down in section 152-110 of the ITAA 1997 have been or will be satisfied. Therefore, any capital gain made on the sale of the company's business premises is exempted from income tax.

Further issues for you to consider

You are required to keep the necessary documentation such as the sale and purchase agreement of the 'active asset' sold for the retention period after the sale of the business premises.