Edited version of your private ruling

Authorisation Number: 1012573796713

Ruling

Subject: Small business capital gains tax concessions

Question 1

Will you meet the requirement in subparagraph 152-10(1)(c)(i) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to applying the small business capital gains tax (CGT) concessions to the capital gain on the sale of the units?

Answer

Yes.

Question 2

Will you meet the requirement in subparagraph 152-110(1)(d)(i) of the ITAA 1997 in relation to applying the 15 year exemption in Subdivision 152-B of the ITAA 1997 to the capital gain on the sale of the units?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling.

Company A is trustee for Unit Trust A. Company B is trustee for Unit Trust B. Both companies conduct a business.

Discretionary Trust C holds units in Unit Trust A and B.

The Units have been held for more than 15 years.

In the 2012-13 financial year, Trust C sold the units in Trust A and B.

Trust C has no cost base for the units.

In the 2012-13 financial year Trust C purchased a business.

The business has a turnover of less than $2 million.

For the year ended 30 June 2013, 100% of the Trust C's distributions went to an individual. The individual was a significant individual of the trust just prior to the CGT event.

The individual is more than 55 years of age.

The individual worked as a director of company C which is the trustee of Trust C.

The individual would work between X to Y hours per week.

The individual was also director of a company that was a beneficiary of Trust C.

The individual carried out various duties relating to the finances of Trust C.

Considering the individual's advanced years they wished to retire from their role as a director of the trustee company.

Given the individual's length of tenure and intimate understanding of company A and B, it was not possible for them to retire until the Trust C's investment in the companies was relinquished.

When company D made an offer to purchase company A and B, an opportunity arose for the individual to retire.

With the sale of company A and B completed, the individual has since resigned from their role as director of company C.

Given the sale of Trust C's investment, many of the individual's duties as a director were no longer applicable.

The individual has passed over all control and day to day running of Trust C to another beneficiary.

Relevant legislative provisions

Income Tax Assessment Act 1997 subparagraph 152-10(1)(c)(i)

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 paragraph 152-110(1)(d)

Income Tax Assessment Act 1997 section 152-125

Income Tax Assessment Act 1997 section 328-110

Reasons for decision

Question 1

The basic conditions for the small business capital gains tax concessions are contained in subdivision 152-A of the ITAA 1997. To qualify for the concessions, you must satisfy several conditions that are common to all the concessions. These are call the basic conditions.

The condition in subparagraph 152-10(1)(c)(i) of the ITAA 1997 is that you are a small business entity for the income year. The income year is the financial year that the relevant CGT event occurs.

Section 328-110 explains the meaning of small business entity. Subsection 328-110(1) states you are a small business entity for an income year (the current year) if:

(a) you carry on a *business in the current year; and

(b) one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your *aggregated turnover for the previous year was less than $2 million;

(ii) your aggregated turnover for the current year is likely to be less than $2 million.

In this case, you commenced business during the 2012-13 financial year. The turnover of this business is well below $2 million. You are a small business entity for the 2012-13 financial year. Therefore, subparagraph 152-10(1)(c)(i) of the ITAA 1997 has been satisfied.

Question 2

Under section 152-125 of the ITAA 1997, payments to a company's capital gains tax (CGT) concession stakeholders are exempt if;

· a capital gain of the company would have been disregarded under section 152-110 of the ITAA 1997 except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985; and

· the company makes one or more payments (whether directly or indirectly through one or more interposed entities) in relation to the exempt amount within 2 years after the relevant CGT event to an individual who was a CGT concession stakeholder of the company or trust just before the event.

Section 152-110 of the ITAA 1997 provides a small business 15-year exemption for companies and trusts. Under this section, a trust can disregard the capital gain from the disposal of a CGT asset if: 

(a) the trust satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions

(b) the trust continuously owned the CGT asset for the 15-year period ending just before the CGT event happened

(c) the trust had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which time the trust owned the CGT asset; and

(d) an individual who was a significant individual of the company just before the CGT event was either:

- at least 55 years old at that time and the event happened in connection with their retirement or

- permanently incapacitated at that time.

 In connection with retirement

The Explanatory Memorandum (EM) to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession:

1.68 One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement.

The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with a taxpayer's retirement', nor does it give any indication of the degree of retirement required in order to take advantage of this concession. It could be argued that the phrase 'in connection with retirement' means that the capital gain arising from the disposal of active assets is to be used to provide funds for a person's retirement rather than to precipitate retirement at the time of the CGT event. The words used in the EM support this interpretation.

The Advanced guide to capital gains tax concessions for small business 2010-11 (NAT 3359) also supports this view. It makes it clear that it is not necessary for there to be a permanent and everlasting retirement from the workforce. However, there would need to be at least a significant reduction in the number of hours worked or a significant change in the nature of the activities to be regarded as a retirement for the purposes of paragraphs 152-105(d) or 152-110(1)(d) of the ITAA 1997. The guide also provides that a CGT event may be 'in connection with your retirement' even if it occurs at some time before retirement.

Application to your circumstances

In this case, the individual was more than 55 years of age and was a significant individual of Trust C just before the CGT event. The individual worked approximately X to Y hours per week in their capacity as a director of company C. The individual retired from their duties as a director of the company C and a company that is a beneficiary of Trust C after CGT event. Accordingly, the CGT event is considered to have happened in connection with the individual's retirement in accordance with paragraph 152-110(1)(d) of the ITAA 1997.