Edited version of private advice

Authorisation Number: 1012629682775

Ruling

Subject: CGT small business concessions

Question

Will the Commissioner, pursuant to section 152-125(4) of the Income Tax Assessment Act 1997 (ITAA 1997), extend the time limit under paragraph 152-125(1)(b) of the ITAA 1997 for payment of the exempt amount to CGT concession stakeholders?

Answer:

Yes

This ruling applies for the following periods:

1 July 2014 to 30 June 2025

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The company (you) are intending to sell a share in your business.

The sale agreement was structured so that settlement of the payment for the sale would be received in the following format:

• a lump sum will be received on transfer date,

• 10 years vendor finance payable with a minimum amount due yearly on 1 July,

• Payments to 1 July 20XX to be interest free, and

• Payments from 1 July 20YY onwards to accrue interest at current bank rate.

It has been agreed by both parties that it is in the best interest for both parties that the vendor finance to be paid down in the shortest time possible. The purchasers are currently hoping to have it paid off within the first five years. The payments will not necessarily be made only on 1 July each year. They will likely be made multiple times a year when the funds become available.

You state that you will be eligible to use the small business capital gains tax (CGT) concessions to disregard the capital gain on the sale of the business under the 15 year exemption on the following basis:

• You have held the shares in the company since 199X,

• You qualify under the threshold test of $6 million maximum net asset value,

• You satisfy the 80% active asset test on the shares, and

• You satisfy the 90% CGT concession stakeholders test.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-125,

Income Tax Assessment Act 1997 Subsection 152-125(1) and

Income Tax Assessment Act 1997 Subsection 152-125(4).

Reasons for decision

Section 152-125 of the ITAA 1997 provides that if a capital gain made by a company or trust is disregarded under the small business 15 year exemption any distributions made by the company or trust of that exempt amount to a CGT concession stakeholder is:

• not included in the assessable income of the CGT concessions stakeholder, and

• not deductible to the company or trust if certain conditions are satisfied.

The conditions are:

• the company or trust must make a payment within two years after the CGT event that resulted in the capital gain or, in appropriate circumstances, such further time as allowed by the Commissioner

• the payment must be made to an individual who was a CGT concessions stakeholder of the company or trust just before the CGT event, and

• the total payments made to each CGT concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholder's control percentage by the exempt amount.

It has been recognised that the requirement to distribute the exempt amount within two years may cause problems where the capital proceeds are to be received by instalments (which is commercial practice). Subsection 152-125(4) of the ITAA 1997 allows the Commissioner to extend the two year time limit.

In determining if discretion should be exercised, the Commissioner will consider the following factors:

• whether there is evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension

• whether there is any prejudice to the Commissioner if the additional time is allowed, however the mere absence of prejudice is not enough to justify the granting of an extension

• whether there is any unsettling of people, other than the Commissioner, or of established practices

• fairness to people in like positions and the wider public interest

• whether there is any mischief involved, and

• a consideration of the consequences.

The Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No 7) Act 2001 states

There is a requirement that the company or trust make the payments relating to the exempt amount within two years of the CGT event. To take into account actual taxpayer circumstances and commercial practices, the Commissioner has a discretion to extend this time limit.

Application to your circumstances

You have sold a share in your business. You will provide vendor financing to the purchasers and the payments will be paid in instalments over 10 years.

Due to the purchasing arrangement in place, you will receive multiple payments more than two years after the CGT event. You are therefore unable to meet the requirements of subsection 152-125(1) of the ITAA 1997 unless the Commissioner extends the time limit.

There would be no prejudice to the Commissioner in allowing the extension. Other people would not be unsettled and it would not be unfair to people in like positions or the wider public. There does not appear to be any mischief involved. It would be fair and equitable in the circumstances to allow an extension of time.

Accordingly, the time limit to make payments to the CGT concession stakeholders of the company will be extended to 30 June 20ZZ.

Please note:

The payments made to each of the CGT concession stakeholders must be made on receipt of each loan instalment. It is considered reasonable that the payments to the CGT concession stakeholders be made within 60 days of receipt of the loan instalment.