Edited version of private ruling

Authorisation Number: 1011696102225

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Ruling

Subject: Small business capital gains tax concessions

Question

Does the 15 year exemption apply on the sale of goodwill of the business so that the distribution to the sole shareholder is not liable for CGT?

Answer

Yes. Providing certain conditions are satisfied.

This ruling applies for the following period<s>:

1 July 2009 to 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The company has carried on business in partnership with other companies since prior to 19 September 1985.

The business has been sold and a capital gain has been made by the company on the sale of the goodwill.

The taxpayer has held some shares in the company since prior to 19 September 1985. The taxpayer was bequeathed the other shares more than 15 years ago.

The company satisfies the maximum net asset value test.

The company has always had a significant individual.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 149-30,

Income Tax Assessment Act 1997 Subdivision 152-A,

Income Tax Assessment Act 1997 section 152-110,

Income Tax Assessment Act 1997 subsection 152-110(1),

Income Tax Assessment Act 1997 section 152-125,

Income Tax Assessment Act 1997 subparagraph 152-125(1)(a)(iii),

Income Tax Assessment Act 1997 subsection 152-125(2) and

Income Tax Assessment Act 1997 subsection 152-125(3).

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise specified.

Summary

Section 152-125 allows the capital gain on a CGT asset acquired before 20 September 1985 to be an exempt amount if certain conditions are satisfied.

Detailed reasoning

Subparagraph 152-125(1)(a)(iii) states that payments to a company's CGT concession stakeholder are exempt if the capital gain was disregarded because the relevant CGT asset was acquired before 20 September 1985, providing that section 152-110 would have otherwise applied.

Section 152-110 provides a small business 15-year exemption for companies and trusts. Under subsection 152-110(1), you can disregard the capital gain from the disposal of your business assets, being CGT event A1 happening to the assets, if you:

· satisfy the basic conditions in Subdivision 152-A for the small business CGT concessions

· continuously owned the CGT asset for the 15-year period ending just before the CGT event happened

· had a significant individual for the entire time you owned the CGT asset (even if it was not the same significant individual during the whole period), and the individual who was a significant individual just before the CGT event was:

· at least 55 years old at that time and the event happened in connection with their retirement, or

· permanently incapacitated at that time.

The basic conditions for relief that must be satisfied are contained in section 152-10. Section 152-10 allows for a capital gain to be disregarded providing:

· a CGT event happens to a CGT asset of yours in an income year

· the event would have resulted in a gain

· 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

· 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

· the CGT asset satisfies the active asset test.

Taxation Ruling IT 2540 explains that under general law, a partnership is not a separate legal entity distinct from the partners. Accordingly, the partnership does not own property in its own right. Partnership assets are vested in the partners. As the business is conducted as a partnership of three companies, it is the companies that own the assets, including the goodwill.

The business has been conducted since before 19 September 1985. Taxation Ruling TR 1999/16 explains that the goodwill is a separate asset and is acquired at the same time as the asset. Therefore the goodwill is a pre CGT asset for the company.

From the application, it appears that you satisfy the basic conditions in Subdivision 152-A and that you have continuously owned the asset for at least 15 years. The first two of the above conditions are therefore satisfied.

The taxpayer was a significant individual, and was over 55 years old at the time of the disposal. However, the event, that is, the disposal of the goodwill, must have happened in connection with her retirement. The second part of the condition relating to permanent incapacitation is not relevant in this case.

The overall impression in your case is that the sale of the goodwill was made in connection with the taxpayers retirement. They were over 55 years of age, and decided as part of their overall retirement strategy to sell. They are likely to continue minor casual work until they can access the funds in the company. This condition is therefore also satisfied.

The sale of the goodwill resulted in a capital gain. The company passes the maximum net asset value test and the goodwill is an active asset. You therefore satisfy all the basic conditions in section 152-10.

As you satisfy all of the above conditions, you can disregard the capital gain from the sale of the goodwill using the small business 15-year exemption.

Other conditions to be satisfied

If a capital gain made by a company or trust is disregarded under the small business 15-year exemption, or would have been except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985, any distribution made by the company or trust of that exempt amount to a CGT concession stakeholder is:

· not included in the assessable income of the CGT concession stakeholder

· not deductible to the company or trust

if certain conditions provided in subsections 152-125(2) and (3) are satisfied.

The conditions are:

· the company or trust must make a payment within two years after the CGT event that resulted in the capital gain

· the payment must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event

· the total payments made to each CGT concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholder's control percentage by the exempt amount.

The first condition above will be satisfied if the payment is made to the taxpayer within two years after CGT event A1 happened, being the disposal of the goodwill.

As the taxpayer was a CGT concession stakeholder of the company just before the CGT event, the second condition is satisfied.

The taxpayer's stakeholder control percentage is 100%, and therefore any payment of the capital gain made to the individual will satisfy the last condition above.