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Ruling
Subject: CGT Small business concessions
Question:
Is the company entitled to the capital gains tax (CGT) small business 15 year exemption concession?
Answer:
Yes.
This ruling applies for the following period
Year ending 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts
The company acquired a farming property prior to 1985.
The property has been used in a farming business for the whole period of ownership.
The company has a number of issued shares and two share holders. All shares have equal voting rights and income entitlements.
One shareholder has more than X% but less Y% of the shares and has owned them prior to 1985. They are over 55 years of age and the sale is in connection with their retirement.
The other shareholder has more than Y% of the shares which were acquired less than 10 years ago.
The company is a small business and the property is an active asset, satisfying the basic conditions of the CGT small business concessions.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Subdivision 152B
Income Tax Assessment Act 1997 - Section - 152-110
Income Tax Assessment Act 1997 - Section - 152-50
Income Tax Assessment Act 1997 - Section - 152-55
Income Tax Assessment Act 1997 - Section - 152-60
Income Tax Assessment Act 1997 - Section - 152-65
Income Tax Assessment Act 1997 - Section - 152-70
Reasons for decision
You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you:
o satisfy the basic conditions for the small business CGT concessions
o continuously owned the CGT asset for the 15 year period ending just before the CGT event happened; and
if you are a company or trust:
o you had a significant individual for a total of at least 15 years of the whole period of ownership, and
o 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.
Significant individual
A company or trust satisfies the significant individual test if it had at least one significant individual just before the CGT event. 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%. The 20% can be made up of direct and indirect percentages.
Total small business participation percentage
An entity's small business participation percentage in another entity at a time is the percentage that is the sum of:
o the entity's direct small business participation percentage in the other entity at that time, and
o the entity's indirect small business participation percentage in the other entity at that time.
Direct small business participation percentage
Companies
An entity's direct small business participation percentage in a company is the percentage of:
o voting power that the entity is entitled to exercise
o any dividend payment that the entity is entitled to receive, or
o any capital distribution that the entity is entitled to receive.
All classes of shares (other than redeemable shares) are taken into account in determining an entity's participation percentage in a company.
In this case, the company has two significant individuals in the two shareholders. Both have more than 20% of the company shares and all shares have equal voting and income entitlements.
The small business 15-year exemption further requires a company or trust to have a significant individual for periods totalling at least 15 of the years of ownership of the CGT asset. One of the company's significant individuals has held his shares for over 15 years and they are over 55 years of age. In order to satisfy the requirements for the 15 year exemption, the CGT event must have happened in connection with the retirement of the significant individual.
Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.
In this case, the company satisfies the basic conditions for the small business CGT concessions and has owned the property for over 15 years. The company has had a significant individual for over 15 years and the significant individual just before the CGT event is over 55 years of age and the event is happening in relation to their retirement. Therefore, the company can disregard any capital gain from the sale of the property under the CGT small business 15 year exemption.