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Ruling

Subject: Small business CGT concessions - 15 year exemption - company

Question 1:

If the company realises a capital gain on the disposal of the property, is that capital gain disregarded under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: Yes.

Question 2:

If the company pays 50% of any capital gain realised on the disposal of the property to shareholder one within two years of the date of the contract of sale of the property, is this amount an exempt payment under section 152-125 of the ITAA 1997?

Answer: Yes.

Question 3:

If the company pays 50% of any capital gain realised on the disposal of the property to shareholder two within two years of the date of the contract of sale of the property, is this amount an exempt payment under section 152-125 of the ITAA 1997?

Answer: Yes.

This ruling applies for the following periods:

1 July 2011 to 30 June 2012.

The scheme commences on:

1 July 2011.

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.

The company has two issued ordinary shares.

One share in the company is legally and beneficially owned by shareholder one. The other share in the company is legally and beneficially owned by shareholder two. They have owned the shares in this manner for more than 15 years.

The company acquired the property more than 15 years ago.

The company has conducted a business on this property for the entire period that it has owned the property.

Shareholder two is now permanently incapacitated and will not work again.

The turnover of the business conducted by the company has always been less than $2 million.

The company proposes to sell the property. On settlement of the sale of the property, the company proposes to pay an amount equal to the net capital gain realised from the sale equally to shareholder one and shareholder two.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 section 152-125

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 328-110(1)

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 paragraph 152-110(1)(d)

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 www.ato.gov.au 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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1:

Under the small business 15-year exemption in section 152-110 of the ITAA 1997, an entity that is a company can disregard any capital gain in relation to the sale of the CGT asset if all of the following conditions are satisfied:

(a)      the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain

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

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

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

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

(ii)       was permanently incapacitated at that time.

Condition (a)

Section 152-10 of the ITAA 1997 contains the basic conditions to be satisfied. These conditions are:

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

(b)      the event would (apart from Division 152 of the ITAA 1997) 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, or

(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.

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

Basic condition (a)

This condition requires a CGT event to happen in relation to your CGT asset in an income year. There will be a CGT event when the property is sold. This is expected to occur in the 2011-12 financial year.

As a CGT event will happen in relation to a CGT asset of yours in the income year in which the disposal occurs, this condition will be satisfied.

Basic condition (b)

A capital gain will result from the above CGT event, and this condition will be satisfied.

Basic condition (c)

You have advised that you are a small business entity as defined in subsection 328-110(1) of the ITAA 1997 and this condition is satisfied.

Basic condition (d)

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

(a)      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 detailed below or

(b)      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 ½ years during the period detailed below:

The period:

(a)      begins when you acquired the asset and

(b)      ends at the earlier of:

(i)      the CGT event and

(ii)      if the relevant business ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) when the business ceased.

Active asset

Section 152-40 of the ITAA 1997 provides the meaning of active asset. A CGT asset is an active asset if it is used or held ready for use in the course of carrying on a business. The land is used in the business of the company and has been used in this way since purchase.

Active asset test

As you have owned the property for more than 15 years, and as discussed above, the property has been an active asset for the entire period of ownership, the active asset test in section 152-35 of the ITAA 1997 is satisfied.

This basic condition is therefore satisfied.

Summary for the basic conditions

You satisfy all of the basic conditions in Subdivision 152-A of the ITAA 1997 and condition (a) is satisfied.

Condition (b)

The property has been owned for a continuous period of more than 15 years this condition is satisfied.

Condition (c)

Both shareholder one and shareholder two qualify as significant individuals within the meaning of section 152-55 of the ITAA 1997 for the entire period the company has owned the property as they each own one share in the company (and hence have a small business participation percentage of 50%) during this time.

This condition is therefore satisfied.

Condition (d)

Paragraph 152-110(1)(d) of the ITAA 1997 merely requires a significant individual of the company to satisfy this requirement. Paragraph 152-110(1)(d) does not require both significant individuals of the company to satisfy this requirement.

Shareholder two satisfies this requirement. They are a significant individual who is permanently incapacitated.

This condition is satisfied.

Conclusion

You satisfy all of the conditions for the small business 15-year exemption in section 152-110 of the ITAA 1997. The exemption will therefore apply to allow you to disregard any capital gain from the disposal of the property during the 20011-12 financial year.

Question 2 and Question 3:

Section 152-125 of the ITAA 1997 states that this section applies to exempt payments to company's CGT concession stakeholders if

· under section 152-110 of the ITAA 1997 a capital gain of a company is disregarded, and

· the company make one or more payments in relation to the exempt amount within two years after the relevant CGT event to an individual who was a CGT concession stakeholder of the company just before the event.

In this case, the company is able to disregard any capital gain under section 152-110 of the ITAA 1997. If the company makes payments to shareholder one and shareholder two, who are both CGT concession stakeholders of the company, within two years of the CGT event, the payments are exempt payments under section 152-125 of the ITAA 1997.