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Edited version of your private ruling
Authorisation Number: 1012613096034
Ruling
Subject: capital gains tax
Question
Are you entitled to the capital gains tax (CGT) small business 15 year exemption concession?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2015
The scheme commenced on
1 July 2014
Relevant facts
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:
• your application for private ruling and
• additional information provided.
Entity A was established several years ago.
All beneficiaries of entity A have entitlement to all income and capital of the trust.
A CGT asset was owned and used by entity A in its business.
An organisation has offered to purchase the CGT asset.
The CGT asset was used in the business for more than 15 years.
Entity A is a small business entity.
Entity B is a significant individual of entity A. Entity B is over 55 and not retired or permanently incapacitated.
Entity B has not planned for retirement as yet.
Entity A meets the basic conditions for the small business CGT concessions.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Division 152
Income Tax Assessment Act 1997 - Subdivision 152-A
Income Tax Assessment Act 1997 - Subdivision 152-B
Income Tax Assessment Act 1997 - Subdivision 152-C
Income Tax Assessment Act 1997 - Subdivision 152-D
Income Tax Assessment Act 1997 - Section - 152-35
Income Tax Assessment Act 1997 - Section - 152-110
Reasons for decision
The CGT provisions provide some small business relief in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997).
Basic conditions
To qualify for the small business CGT concessions, the basic conditions as contained in subdivision 152-A of the ITAA 1997 must be satisfied.
The basic conditions are:
• 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.
Active asset test
A capital gains tax (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.
Subsection 152-40(1) of the ITAA 1997 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.
The CGT asset satisfies the active asset test.
15 year exemption - conditions for companies and trusts
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
(c) the trust had a significant individual for a total of at least 15 years during which time the trust owned the CGT asset; and
(d) an individual who was a significant individual of the trust just before the CGT event was either:
- 55 or over at that time and the event happened in connection with their retirement or
- permanently incapacitated at that time.
In your case, entity A meets the basic conditions for the small business CGT concessions. Also entity A has owned the CGT asset for a 15 year period and satisfies the significant individual test.
Therefore entity A will be entitled to the CGT small business concession 15 year exemption where the CGT event happens 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 for the purposes of paragraph 152-110(1)(d) of the ITAA 1997. Although it is not necessary for there to be a permanent and everlasting retirement from the workforce, in this case as the significant individual is not currently planning to retire, entity A is not entitled to the 15 year exemption.