Edited version of your private ruling

Authorisation Number: 1012536712608

Ruling

Subject: CGT small business concessions

Question 1

Is X eligible for the 50% active asset reduction in relation to the disposal its portion of the property?

Answer

Yes

Question 2

Is X eligible to choose the retirement exemption in relation to the disposal its portion of the property?

Answer

Yes

Question 3

If X chooses to apply the retirement exemption in accordance with section 152-315 of the Income Tax Assessment Act 1997 (ITAA 1997), can a non-assessable, non-exempt payment be made to the relevant CGT concession stakeholder to comply with section 152-325 of the ITAA 1997 within seven days of making the choice?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

The property is jointly owned by X and a related entity.

The property has been used by related entities in the course of carrying on their business since the acquisition date.

The property has not been used for any other purpose.

It is expected that a contract for the sale of the property will be entered into in the 20XX financial year. X will make a capital gain.

The net value of the assets of X and its affiliates and connected entities is less than $6million.

The relevant CGT concession stakeholder will be over 55 years of age at the relevant time.

The relevant CGT concession stakeholders has never used any of their $500,000 capital gains tax (CGT) retirement exemption limit per section 152-320 of the ITAA 1997.

You have provided details of the shareholdings of related companies and trustee and distribution details of the related trusts.

There is no formal lease in place between the owners of the property and the entities that carry on their business from the property due to the close intertwined relationships between the parties.

The major reason for the acquisition of the property was for the use in the relevant companies' businesses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 152-10(1)

Income Tax Assessment Act 1997 Section 152-35

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 152-75

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Section 152-220

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 Subsection 152-310(2)

Income Tax Assessment Act 1997 Section 152-315

Income Tax Assessment Act 1997 Section 152-325

Income Tax Assessment Act 1997 Subsection 152-310(2)

Income Tax Assessment Act 1997 Section 328-130

Reasons for decision

Summary

X will satisfy the basic conditions for the small business concessions and the 50% active asset reduction will apply to the capital gain from the disposal of the property.

The additional requirements for the retirement exemption will also be met. If X chooses to apply the retirement exemption in accordance with section 152-315 of the ITAA 1997, a non-assessable, non-exempt payment can be made to the relevant CGT concession stakeholder to comply with section 152-325 of the ITAA 1997 within seven days of making the choice.

Detailed Reasoning

Basic Conditions

In order to be eligible for the small business CGT concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997:

a) a CGT event happens in relation to an asset that the taxpayer owns

(b) the event would otherwise have resulted in a capital gain

(c) one or more of the following applies

(i) the taxpayer satisfies the maximum net asset value test

(ii) the taxpayer is a "small business entity" for the income year

(iii) the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or

(iv) the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year and

(d) the asset satisfies the active asset test.

In this case a CGT event will occur when a contract of sale is entered into. The CGT event will result in a capital gain if the capital proceeds exceed the cost base of the asset. Additionally, it is assumed that X will satisfy the maximum net asset value test just before the CGT event.

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if:

· 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 detailed below, or

· you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period.

The test period:

· begins when you acquired the asset, and

· ends at the earlier of

o the CGT event, and

o when the business ceased, if the business in question ceased in the 12 months before the CGT event (under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months).

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

Affiliate

An affiliate is an individual or a company that, in relation to their business affairs, acts or could be reasonably expected to act in accordance with your directions or in concert with you. The Advanced guide to capital gains tax concessions for small business 2012-13 (NAT 3359), provides a number of relevant factors that may support a finding that a person is an affiliate of a taxpayer:

· the existence of a close family relationship between the parties

· the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other

· the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations, and

· the actions of the parties.

Application to your circumstances

In this case, the relevant interest in the property is owned by X and has been used in the business of related parties.

A close family relationship exists between the relevant individuals. All of the relevant individuals are the directors of the entities that use the property in their business. Additionally, all of the relevant individuals have an ownership interest in the property via the respective discretionary trusts. There is no formal lease agreement in place. The way the parties act, or could reasonably be expected to act, in relation to each other would be based on their personal relationships.

It is accepted that the parties have an understanding as to a common purpose or object and the concerted action is to a common end. Accordingly, we accept that the entities that use the property in their business are affiliates of X.

The property has always been an active asset as it has been used in the business of entities that are affiliates of X. Accordingly, the active asset test contained in section 152-35 of the ITAA 1997 is satisfied. Therefore, provided the CGT event results in a gain, the basic conditions in 152-10(1) of the ITAA 1997 will be satisfied.

Active Asset Reduction

The 50% active asset reduction contained in subdivision 152-C of the ITAA 1997 applies automatically to reduce an eligible capital gain if the basic conditions are met. However, in accordance with section 152-220 of the ITAA 1997, a taxpayer can choose not to apply the 50% active asset reduction.

Application to your circumstances

As X will meet the basic conditions, the capital gain from the sale of the property that remains after applying any current year capital losses and any unapplied prior year net capital losses will be reduced by 50%.

Retirement exemption

The rules covering the small business retirement exemption are contained in Subdivision 152-D of the ITAA 1997. An entity may choose to disregard all or part of a capital gain under the retirement exemption if certain conditions are satisfied.

If the entity is a trust, they can choose to disregard all or part of a capital gain where all of the following conditions are met:

· the trust satisfies the basic conditions

· the trust satisfies the significant individual test (that is, there was at least one significant individual just before the CGT event)

· a written record of the amount disregarded is kept and if there are more than one CGT concession stakeholders, each stakeholder's percent of the exempt amount (one may be nil, but together they must add up to 100%) (section 152-315 of the ITAA 1997)

· a payment is made to at least one of the CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount (section 152-325 of the ITAA 1997)

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

· where the capital proceeds are received in instalments, a payment is made to a CGT concession stakeholder for each instalment in succession.

The payment to the CGT concession stakeholders must be made by the later of seven days after making the choice or seven days after you receive the capital proceeds from the relevant CGT event.

The amount of the capital gain the company disregards cannot exceed the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment. 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.

If a CGT concession stakeholder is under 55 years of age just before a payment is made in relation to them, the company must make the payment by contributing it to a complying superannuation fund or RSA on their behalf. There is no requirement to make this contribution if the stakeholder is 55 years or older.

CGT concession stakeholder

As per section 152-60 of the ITAA 1997 an individual is a CGT concession stakeholder of a 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 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.

An entity's direct small business participation percentage in a discretionary trust is the percentage of:

· distributions of income that the entity is beneficially entitled to during the income year

· distributions of capital that the entity is beneficially entitled to during the income year; or

· if they are different, the smallest of the two 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.

Application to your circumstances

As discussed, X will satisfy the basic conditions in relation to the disposal of the property. Based on the assumption that Y will receive more than 20% of the distributions from X in the 20XX financial year, Y will have a participation percentage in X of more than 20% in the relevant year. In turn, based on the assumption that the relevant CGT concession stakeholder will receive more than 20% of the distributions from the Y in the 20XX financial year, the relevant CGT concession stakeholder will be a significant individual and the significant individual test will be satisfied.

X will be eligible to choose the retirement exemption to disregard all or part of the capital gain. However, there are further requirements that must be met after making the choice.

Provided that X meets the requirements of section 152-315 of the ITAA 1997 in relation to making the choice and section 152-325 of the ITAA 1997 in relation to making the payments to CGT concession stakeholders, the eligibility requirements for the small business retirement exemption will be met.

Payments to CGT concession stakeholders under the retirement exemption

Where a company or trust makes a choice to disregard all or part of a capital gain under the retirement exemption and the company or trust receives capital proceeds from the relevant CGT event, a payment must be made to one or more of the CGT concession stakeholders in accordance with section 152-325 of the ITAA 1997.

Where a payment is made to a CGT concession stakeholder to comply with section 152-325 of the ITAA 1997, it is not assessable income and not exempt income of the CGT concession stakeholder (subsection 152-310(2) of the ITAA 1997).

Accordingly, if X chooses to apply the retirement exemption in accordance with section 152-315 of the ITAA 1997, a non-assessable, non-exempt payment can be made to the relevant CGT concession stakeholder to comply with section 152-325 of the ITAA 1997 within seven days of making the choice. As the relevant CGT concession stakeholder will both be over the age of 55, there is no requirement that this amount be made by contributing it to a complying superannuation fund or RSA on his behalf.

The payment must be made by reference to the CGT concession stakeholder's percentage of the exempt amount.