Edited version of private ruling

Authorisation Number: 1011712625436

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Ruling

Subject: CGT small business concessions

Question 1

Are you entitled to the CGT small business concession in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answers

No

Question 2

Are you entitled to the CGT small business concession in Subdivision 152-C of the ITAA 1997?

Answers

Yes.

Question 3

Are you entitled to the CGT small business concession in Subdivision 152-D of the ITAA 1997?

Answers

Yes

Question 4

Are you entitled to the CGT small business concession in Subdivision 152-E of the ITAA 1997?

Answers

May not apply as you are claiming the retirement exemption.

This ruling applies for the following period

1 July 2010 to 30 June 2011.

The scheme commenced on

During the 2011 income year

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling

You are carrying on a business and trading as ABC rentals (the company).

X and Y are shareholders of the company.

Each shareholder owns 50% shares of the company.

The business was purchased in July 2000.

The turnover of the business is less than $ 1,000,000.00

The plant and equipment is used daily in the running of the business.

You do not conduct any other business other than ABC Rentals.

The business is being sold as a going concern, by selling all the assets and goodwill of the business. Your shareholders are planning to retire on the sale of the business. They are both over 55 years old.

The sale of the asset is set for January 2011.

You have stated that the business satisfies the active asset test.

You derive income only from ABC Rentals.

You have stated that the capital proceeds from the sale of business would be used for the shareholders retirement.

Assumptions

1 The company will make a choice under subsection 152-325(1).

2. The company will make a payment to at least one of its CGT concession stakeholders (shareholders)

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Section 152-5

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 Subsection 152-305(2)

Income Tax Assessment Act 1997 Section 152-310

Income Tax Assessment Act 1997 Section 103-25

Income Tax Assessment Act 1997 Section 152-40

Reasons for decision

Detailed reasoning

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

Subdivision 152-A sets out the basic conditions for CGT small business relief.

Section 152-10 sets out the conditions for relief. If the basic conditions are satisfied, an entity may be able to reduce its capital gains using the small business concessions in this division.

The 3 major basic conditions are:

(1) the entity must be a small business entity or partner in a partnership that is a small business entity or the net value of assets that the entity and related entities own must not exceed $6,000,000;

(2) the CGT asset must be an active asset:

(3) if the asset is a share or interest in a trust, there must be a CGT concession stakeholder just before the CGT event, and the entity claiming the concession must be a CGT concession in the company or trust or CGT concession stakeholders in the company or trust must have a small business participation percentage in the entity of at least 90%..

A requirement of the active asset test contained in section 152-35 is that the CGT asset must be an active asset for at least half of the period from when you acquired it until the earlier of the CGT event or when you ceased business, if the relevant business has ceased to be carried on in the 12 months before the CGT event. The Commissioner can allow a longer period than 12 months to cease business before the CGT event.

The meaning of the active asset is set out in section 152-40. It must firstly satisfy one of the 'positive test' in subsection 152-40(1) and then also not be excluded by one of the exceptions in subsection 152-40 (4).

Under subsection 152-40 (1) a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c).

An asset whose main use is to derive rent (unless that main use is only temporary) cannot be an active asset. This is because the asset in these circumstances is a passive asset.

The Commissioner has previously determined trucks used in the course of carrying on a business to derive rent/hire charges from their short term hiring, to be replacement assets assets. To be a replacement asset for the purpose of the small business rollover the asset must be an active asset. The assets were considered active assets because the rental was short term. Hence the assets were not considered to be passive assets.

You are carrying on a business of hiring equipment for party hires and these are only short term hires. As per Commissioner's view above, we agree that CGT assets used in your business are active assets.

From the information that you have provided, we consider that you have satisfied all the basic conditions under section 152-10.

In addition to the basic conditions each of the concessions has additional specific conditions that also must be satisfied.

Subdivision 152-B Small business 15 year exemptions.

Section 152-110 gives the guide lines for the 15 year exemption for companies and trusts.

Subsection 152-110(1) (b) states as follows.

the entity continuously owned the CGT asset for the 15 year period ending just before the CGT event;

As you have not owned the asset for a continuous period of 15 years, this exemption will not be available to you.

Subdivision 152-C Small business 50% reduction.

This subdivision tells us how to apply the small business 50% reduction. A capital gain is reduced by 50%, if the basic conditions in subdivision 152-A are satisfied.

As you have satisfied all the conditions in subdivision 152-A, the company can apply the small business 50% reduction.

Subdivision 152-D Small business retirement exemption

Section 152-300 states that you can choose to disregard a capital gain from a CGT event happening to a CGT asset of your small business if the capital proceeds from the event are used in connection with the retirement of your significant individuals.

Subsection 152-305(2) states as follows:

A company or trust (except a public entity-see subsection (3) can also choose to disregard such an amount if:

(a) the basic conditions in subdivision 152-A are satisfied for the capital gain; and

(b) the entity satisfies the significant individual test (see section 152-50); and

(C) the company or trust conditions in section 152-325 are satisfied.

Section 152-50 states that an entity satisfies the significant individual test if the entity had at least one significant individual just before the CGT event.

Section 152-55 states that an individual is a significant individual in a company or a trust at a time if at that time, the individual has a small business participation percentage in the company or trust of at least 20%.

As each shareholder owns 50% of the shares of the company, they have a small business participation percentage of greater than 20%; therefore you satisfy the significant individual test.

Subsection 325(1) states that a company or trust must make a payment to at least one of its CGT concession stakeholders if the company or trust receives an amount of capital proceeds from a CGT event for which it makes a choice under this subdivision.

Paragraph (a) of the definition of CGT concession stakeholder in section 152-60 states a significant individual in a company or trust is a CGT concession stakeholder.

Section 152-310 states that a choice has to be made by the individual, company or trust for the CGT exempt amount to be disregarded.

Section 103-25 tells us when the choice must be made and subsection 103-25(1)(a) provides that the choice must be made by the day you lodge your income tax return for the income year in which the relevant CGT happened.

The payment must be made by the later of:

(i) 7 days after the company makes the choice; and

(ii) 7 days after the company receives an amount of capital proceeds from the CGT event.

According to section 152-300, you can choose to disregard a capital gain from a CGT event happening to a CGT asset of your small business if the capital proceeds from the event are used in connection with the retirement of your significant individuals.

There is a lifetime limit of $500,000 for all choices that can be made in respect of an individual under this subdivision.

As you satisfy all the conditions, you are entitled to the retirement exemption under subsection 152-305(2).

Subdivision 152-E Small business roll-over

A small business roll-over allows you to defer the making of a capital gain from a CGT event happening in relation to one or more small business assets if the basic conditions in subdivision 152-A are satisfied for the gain.

This may not apply to you as you can have access to the retirement exemption

As there is no indication that a replacement asset is being considered this exemption does not apply.