Edited version of your private ruling

Authorisation Number: 1012533500699

Ruling

Subject: Capital gains tax

Question 1

Is the company entitled to use the retirement exemption under subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) for the sale of the business?

Answer

Yes.

Question 2

Is the company entitled to use the small business roll over concession under subdivision 152-E of the ITAA 1997 for the sale of the business?

Answer

Yes.

Question 3

Is the value of the company shares $11,291 for each director?

Answer

Invalid - this is not a relevant taxation provision to which the Commissioner can provide a private binding ruling on under section 357-55 of schedule 1 of the Taxation Administration Act 1953.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1990

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.

Director 1 started a business in the early 1980's with no clients or goodwill.

Director 1 commenced a partnership with Director 2 in the late 1980's to provide additional services to the existing business.

Director 1 and Director 2 formed the company in 1990. There was no consideration paid by the company for the clients or goodwill, it was a continuation of the existing business.

The company directors own 6 shares (50%) each.

In 2012 the business was sold.

The company has existing capital losses. Therefore, there was a net capital gain.

The net assets of the businesses connected with the company directors do not exceed $6 million.

The annual business turnover was less than $2 million.

The business held an active asset for more than 15 years, and the asset was a active asset for at least 7 and a half years.

The company intends to make a small business retirement election for Director 1.

Director 2 intends to buy another business. If this does not occur within the rollover period, the company will make a small business retirement election for Director 2.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A.

Income Tax Assessment Act 1997 Subdivision 152-D.

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

Income Tax Assessment Act 1997 Section 152-50.

Income Tax Assessment Act 1997 Section 152-60.

Income Tax Assessment Act 1997 Section 152-305.

Income Tax Assessment Act 1997 Section 152-310.

Income Tax Assessment Act 1997 Section 152-320.

Income Tax Assessment Act 1997 Section 152-400.

Income Tax Assessment Act 1997 Section 152-410.

Income Tax Assessment Act 1997 Section 152-415.

Income Tax Assessment Act 1997 Subsection 104-185(1).

Income Tax Assessment Act 1997 Section 104-197.

Income Tax Assessment Act 1997 Subsection 152-325(1).

Income Tax Assessment Act 1997 Section 103-25.

Income Tax Assessment Act 1997 Subdivision 152-E.

Taxation Administration Act 1953 Section 357-55 of schedule 1.

Reasons for decision

Summary

As the company satisfies the basic conditions, it is eligible to apply both the small business retirement and rollover exemptions. However, it can only apply the small business retirement exemption to the remainder of the $500,000 lifetime capital gains tax (CGT) retirement exemption limit for both directors.

The company has a period ending two years after the last CGT event during the financial year in order to find a replacement asset. If no replacement asset is acquired, the company can elect to apply the small business retirement exemption to the remainder of the $500,000 lifetime CGT retirement exemption limit for Director 2. This would result in the company including a capital gain of the amount in excess of both directors lifetime limits in the income tax return.

We have not ruled on whether your calculation of the company share value is correct. This is because it is not a relevant taxation provision to which the Commissioner can provide a private binding ruling on.

Detailed reasoning

Basic conditions

The small business retirement and rollover exemptions are two of the small business CGT concessions. The basic conditions for the small business CGT concessions are set out in Subdivision 152-A of the ITAA 1997. The basic conditions relevant in this case are the small business entity test and the active asset test.

In the application for your private ruling it was stated that the company is a small business entity and that the asset sold by the company was an active asset. Therefore, the company has satisfied the basic conditions for the CGT concessions.

Small business retirement exemption

Subdivision 152-D of the ITAA 1997 contains the small business retirement exemption. You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions.

If you are a company or trust, other than a public entity, you can choose to disregard all or part of a capital gain where you meet all the following conditions contained in subsection 152-305(2) of the ITAA 1997:

· you satisfy the basic conditions

· you satisfy the significant individual test

· you keep a written record of the amount you choose to disregard (the exempt amount) and, if there are more than one CGT concession stakeholders, each stakeholder's percentage of the exempt amount (one may be nil, but together they must add up to 100%)

· you make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount

· the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and

· where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession (up to the asset's CGT exempt amount).

If a CGT concession stakeholder is under 55 years old just before receiving a payment, an amount equal to that payment must be immediately paid to a complying superannuation fund or retirement savings account (RSA) on their behalf. The company or trust must notify the trustee of the fund or the RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption.

There is no requirement to make this contribution if the stakeholder was 55 years old or older.

You must make payments:

· seven days after you choose to disregard the capital gain if you choose the retirement exemption for a J2, J5 or J6 event, or

· in any other case, by the later of

o seven days after you choose to disregard the capital gain, and

o seven days after you receive the capital proceeds from the CGT event.

Section 152-50 of the ITAA 1997 states that an entity satisfies the "significant individual" test if the entity had at least one significant individual before the CGT event. An individual is a "significant individual" in a company if the individual has at least a 20% small business participation percentage in the company.

In this case the company has two significant individuals. They each hold a 50% small business participation percentage in the company.

Section 152-60 of the ITAA 1997 provides that an individual is a CGT concession stakeholder of a company or trust at a time if the individual is a significant individual in the company or trust.

The consequence of choosing the retirement exemption (section 152-305 of the ITAA 1997) for any part of the capital gain from the CGT asset is that, that part of the capital gain which equal to its CGT exempt amount is disregarded (subsection 152-310(1) of the ITAA 1997). Additional conditions are stated in subsection 152-310(2) of the ITAA 1997.

The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment.

Under section 152-320 of the ITAA 1997, 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.

A company or trust may determine the percentage of the exempt amount attributable to each stakeholder, having regard to each stakeholder's retirement exemption limit (or remaining limit).

The company will elect to make a superannuation payment under the retirement exemption to Director 1. As he is under 55 years of age, the company must make the payment to a complying superannuation fund or retirement savings account on his/her behalf.

As Director 1 has already disregarded a portion of his/her $500,000 lifetime CGT retirement exemption limit, the company can only choose to apply the election to the remaining amount.

Therefore, there is still a capital gain remaining for the company.

Small business roll-over concession

You may choose a roll-over under Subdivision 152-E of the ITAA 1997 if you satisfy the basic conditions in Subdivision 152-A of the ITAA 1997. This roll-over allows the deferral of the capital gain in regard to an asset until a later time under section 152-400 of the ITAA 1997. You may acquire either a replacement active asset or incur fourth element expenditure (capital improvement to an existing asset that will be an active asset) (Note 1 to section 152-410 of the ITAA 1997).

If you meet these requirements you can then disregard all or part of each capital gain to which Subdivision 152-E of the ITAA 1997 applies (section 152-415 of the ITAA 1997).

For you to obtain a roll-over, subsection 104-185(1) of the ITAA 1997 requires you to acquire a replacement active asset within a period starting one year before, and ending two years after the last CGT event during the financial year for which you obtain the roll-over.

CGT event J5 would occur if a replacement asset is not acquired within two years and a capital gain would arise (section 104-197 of the ITAA 1997). At this point the small business retirement exemption can be chosen (subsection 152-325(1) of the ITAA 1997).

If the company acquires either a replacement active asset or incurs fourth element expenditure within the time period it may be eligible for the small business roll-over under section 152-410 of the ITAA 1997. If the CGT event occurs during the financial year ended 30 June 2013, the tax on the capital gain can be deferred until the financial year ended 30 June 2015 while it looks for a replacement active asset or incurs capital expenditure on an existing asset that becomes an active asset within the time period.

In this case, the company has chosen to access the retirement exemption for a portion of the net capital gain. The company will choose to apply the small business rollover to the remaining amount. If, at the end of the roll over period, the company has not acquired a replacement asset, it can choose to apply the retirement exemption on behalf of Director 2.

As Director 2 has already disregarded a portion of his/her $500,000 lifetime CGT retirement exemption limit, the company can only choose to apply the election to the remaining amount. As he is under 55 years of age, the company must make the payment to a complying superannuation fund or retirement savings account on his/her behalf.

Therefore, the company would then have to include the remaining capital gain in their income tax return. The company cannot then apply the 50% active asset discount.

Choice

Subsection 103-25(1) of the ITAA 1997 provides that a choice in regard to the CGT small business concessions must be made:

· by the day you lodge your income tax return for the income year in which the relevant CGT event happened, or

· within further time allowed by the Commissioner.

Paragraph 103-25(3)(b) of the ITAA 1997 requires a choice to apply the small business retirement exemption in writing.

However if you choose the small business roll-over and are unable to acquire a replacement asset or incur capital expenditure in the required time period of two years, you may choose the small business retirement exemption.

Value of shares

A private ruling is a written expression of the Commissioner's opinion in respect of a relevant provision as defined in section 357-55 of Schedule 1 to the Taxation Administration Act 1953.

Your question, as to the value of the company shares, is not in relation to a relevant provision and is, therefore, invalid.