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Ruling

Subject: Small business capital gains tax concessions

Question 1

Are you entitled to apply the 50% discount in Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997) to the capital gain from the sale of your shares?

Answer

Yes.

Question 2

Are you entitled to apply the 50% active asset reduction in Division 152 of the ITAA 1997 to the capital gain from the sale of your shares?

Answer

Yes.

Question 3

Are you entitled to apply the retirement exemption in Division 152 of the ITAA 1997 to the capital gain from the sale of your shares?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The company is a small business entity with an aggregated annual turnover of less than $2 million.

You acquired X shares in the 2002-03 financial year. You acquired a further X shares in the 2004-05 financial year.

You owned a total of X ordinary shares in the company.

You disposed of the shares in the 2012-13 financial year.

You satisfy the maximum net asset value test.

You are over 55 years of age.

80% of the assets held by the company were active during the period you owned the shares.

You have not previously disregarded a capital gain under the retirement exemption.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152,

Income Tax Assessment Act 1997 subsection 152-10(2),

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 152-60,

Income Tax Assessment Act 1997 section 152-65,

Income Tax Assessment Act 1997 subsection 152-70(1), and

Income Tax Assessment Act 1997 section 152-75.

Reasons for decision

Question 1

Under section 115-10 of the Income Tax Assessment Act 1997 (ITAA 1997), to qualify for the 50% general discount a capital gain must be made by an individual, a complying superannuation entity, a trust or a life insurance company. The capital gain must result from a capital gains tax (CGT) event happening after 11:45am on 21 September 1999 and must not have an indexed cost base. Also, the gain must result from a CGT event happening to an asset that was acquired at least 12 months before the CGT event.

Application to your circumstances

In your case, you acquired shares in the 2002-03 and 2004-05 financial years. These shares were then sold in the 2012-13 financial year. Both parcels of shares were held for more than 12 months; therefore you are entitled to apply the 50% discount to your capital gain.

Question 2

Basic conditions

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. Division 152-C of the ITAA 1997 applies the small business 50% active asset reduction provided the basic conditions are satisfied.

A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied:

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

· The event would have resulted in a gain,

· The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

· 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 in section 152-15 of the ITAA 1997,

· you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

· you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

Additional basic conditions for shares in a company

Under subsection 152-10(2) of the ITAA 1997, if the CGT asset is a share in a company or an interest in a trust (the object company or trust), one of these additional basic conditions must be satisfied just before the CGT event:

(a) you are a CGT concession stakeholder in the object company or trust;

or

(b) CGT concession stakeholders in the object company or trust together have a small business participation percentage in you of at least 90%.

CGT concession stakeholder

As per section 152-60 of the ITAA 1997 an individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero.

Under section 152-55 of the ITAA 1997 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%. This 20% can be made up of direct and indirect percentages.

Small business participation percentage

Under section 152-65 of the ITAA 1997 an entity's small business participation percentage in another entity at a time is the percentage that is the sum of:

· the entity's direct small business participation percentage in the other entity at that time, and

· the entity's indirect small business participation percentage in the other entity at that time.

Under subsection 152-70(1) of the ITAA 1997 an entity's direct small business participation percentage in a company is the percentage of:

· voting power that the entity is entitled to exercise

· any dividend payment that the entity is entitled to receive, or

· any capital distribution that the entity is entitled to receive, or

· if they are different, the smallest of the three definitions above.

Section 152-75 of the ITAA 1997 details that an entity's indirect small business participation percentage in a company or trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity, and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.

Active asset test

A CGT asset will satisfy the active asset test 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 test period, 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 7½ years during the test period.

The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business.

Subsection 152-40(1) details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Subsection 152-40(3) determines that a share in a company that is an Australian resident can also be an active asset. This is provided that the total of:

· the market values of the active assets of the company or trust; and

· the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; and

· any cash of the company or trust that is inherently connected with such a business;

· is 80% or more of the market value of all of the assets of the company or trust.

The 80% test will taken to have been met where breaches of the threshold are only temporary in nature and in circumstances where it is reasonable to conclude that the 80% threshold has been passed.

Application to your circumstances

In this case, you sold shares held in a company. In order to access the small business concessions you will not only have to satisfy the standard basic conditions, but also the additional basic condition set out in subsection 152-10(2) of the ITAA 1997.

As per subsection 152-40(3) of the ITAA 1997, the shares will be considered an active asset provided that 80% of the assets held by the company satisfy the active asset test. The information provided is that the company meets this test. Therefore, as you satisfy the maximum net asset value test and the shares pass the active asset test, the standard basic conditions have been met.

The additional basic condition requires you to be a CGT concession stakeholder in the object company just prior to the CGT event. In this case, you held more than 20% of the shares in the company just before the CGT event which gives you a small business participation percentage in the company of more than 20%. You are a CGT concession stakeholder in the company and therefore the additional basic condition has been satisfied.

As you have satisfied each of the basic conditions, you are entitled to apply the 50% active asset reduction to the capital gain.

Question 3

Retirement exemption

If you are an individual, you can choose to disregard all or part of a capital gain under the retirement exemption if:

· you satisfy the basic conditions

· you keep a written record of the amount you choose to disregard, and

· if you are under 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account.

· You must make the contribution when you made the choice to use the retirement exemption, or when you received the proceeds (whichever is later).

· The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit. An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption.

Application to your circumstances

As discussed in question 2, you have satisfied the basic conditions. You are over 55 years of age, therefore you are not required to make a personal contribution to a complying superannuation fund. Provided you keep a written record of the amount you choose to disregard, you are entitled to apply the retirement exemption to your capital gain.