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Ruling

Subject: CGT - Small business concessions - 15 year exemption

Question

Is the company entitled to the small business 15 year exemption?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

The company was established in after 1 July 1975.

The company is wholly owned by X and Y who have been the only shareholders and directors since the company's incorporation.

X holds over 10 shares in the company, Y holds over 10 shares and the remaining less than 10 shares are owned jointly by X and Y. The shareholding structure has not changed since the company's incorporation.

The X and Y acquired a property in after 1 July 1981. They then sought council permission to build a factory on the property.

The company ran its business from the property and leased it at commercial rates from the X and Y.

The company purchased the property from the X and Y after 1 July 1985.

The company continued to run its business from the property from the date of purchase for less than 10 years.

After 1 July 1993, the company's operations were downsized and were moved to a smaller premises.

From after 1 July 1993 the property was leased to unrelated parties, until it was sold after 1 July 2009.

The total assets for X and Y and their associated entities including the company at the time of the sale was less than $6million.

At the time of the sale the X and Y were both over the age of 55.

The sale of the property is the first asset sale by X and Y as they commence the transition to retirement.

The company had diversified the business activities by acquiring land and establishing a new business activity after 1 July 1995. This business venture was initially successful however, in recent years, due to external factors, the company has leased the new business facilities and buildings to an unrelated entity. The company continues to sell small quantities of stock from the new business activity from reserves produced in prior years, however it no longer actively operates due to the poor economics of the venture.

It is intended to sell the new business facilities and land as soon as economic circumstances improve. In the meantime the land and facilities will be held as a passive asset generating rental income and the sales of any remaining stock will be made.

The only other asset of the company is a warehouse which is currently used to store spare parts that was manufactured by the company years ago.

The income from the company's sales and servicing has been declining since 1 July 2005.

Effectively all active business for the company has ceased.

It is intended that the company will pay any gain from the sale of the property to a superannuation fund for X and Y who will draw a regular pension from the fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-55

Income Tax Assessment Act 1997 Section 152-110

Reasons for decision

To qualify for the small business capital gains tax (CGT) concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'. Each concession also has further requirements that you must satisfy for the concession to apply (except for the small business 50% active asset reduction which applies if the basic conditions are satisfied).

The Advanced guide to capital gains tax concessions for small business 2010-11 (NAT 3359) provides a detailed explanation of the conditions for each concession.

Basic Conditions

In your case, it is accepted that you meet the basic conditions due to the following:

· a CGT occurred when the company disposed of the property

· the event resulted in a gain

· the company meets the maximum net value asset test

· the asset meets the active asset test.

Small business 15 year exemption

For a company to be eligible for the small business 15-year exemption it must satisfy the basic conditions and two further conditions:

· the company had a significant individual for a total of at least 15 years of the whole period of ownership (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.

An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. Both X and Y held more than a 20% share in the company for more than 15 years. Accordingly, both X and Y are significant individuals.

From the information provided, including the winding down of business operations and X and Y's intent to continue to sell company assets, it is accepted that the CGT event was in connection with X and Y's retirement.

Accordingly, the company meets the additional requirements and is entitled to the small business 15 year exemption.