Edited version of your written advice

Authorisation Number: 1012638699040

Ruling

Subject: CGT small business concessions

Question 1

Is the company's client register an active asset?

Answer

Yes

Question 2

Will the partial sale of the client register be the sale of an active asset?

Answer

Yes

Question 3

Can the company reduce any capital gain made on the partial sale of the client register using the active asset reduction contained in subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 4

Can the company choose to reduce any capital gain made on the partial sale of the client register using the small business retirement exemption contained in subdivision 152-D of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

X held all of the shares in the company.

Subsequently, a number of the shares were sold to Y.

X and Y are the only directors and shareholders in the company.

The company has an annual turnover of less than $2million per annum.

You have stated that there are no other affiliates or connected entities whose annual business turnover needs to be included in the aggregated turnover test.

The company's net asset value is less than $6 million.

The company has an agency agreement with Z.

The company does not have any other additional agency agreements.

The company intends to dispose of a portion of its client register to fund X's retirement.

The company intends to sell a portion of its client register to another entity who has an agency agreement with Z.

Once the sale is complete, the funds from the sale would be transferred to X.

X intends to retire in the near future; X is over 55 years of age.

X has not utilised any of their CGT retirement exemption lifetime limit.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Paragraph 108-5(2)(a)

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-55

Income Tax Assessment Act 1997 Section 152-60

Income Tax Assessment Act 1997 Paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 Section 152-315

Income Tax Assessment Act 1997 Section 152-325

Reasons for decision

Active Asset

The definition of a CGT asset is found in subsection 108-5(1) of the ITAA 1997 and reads as follows:

 (1)   A CGT asset is:

  (a)   any kind of property; and

(b)   a legal or equitable right that is not property.

Taxation Ruling TR 2000/1 discusses the consequences of acquiring and disposing of insurance registers. The contractual rights of an agent under an agency agreement constitute a legal chose in action. The contractual rights to future renewal, CPI and/or orphan policy commissions are part of this legal chose in action. Whether the rights to these commissions can be severed from the legal chose in action and assigned as presently existing property, depends on the terms of the agency agreement.

TR 2000/1 provides that an insurance register is an income producing asset in its own right when the right to future renewal, CPI and/or orphan policy commissions is severable from the remainder of the agency agreement and the severed contractual right is founded on the provision of past consideration and not the future personal exertion of the agent.

In this case, the payments under the agency agreement are established upon the lodgment of a client's application, not upon the provision of services. The agency agreement allows for the right to transfer and allocate policies between planners and the agency agreement will not cease following the event of a partial sale of the client register.

Accordingly, the client register in this case can be separately identified as presently existing property able to be assigned. It is a capital asset, and a CGT event will occur when it is disposed of.

A part of a CGT asset is also a CGT asset in accordance with paragraph 108-5(2)(a) of the ITAA 1997. Therefore part of a client register is a CGT asset.

The definition of an active asset includes at paragraph 152-40(1)(a) of the ITAA 1997:

A *CGT asset is an active asset at a given time if, at that time, you own it and:

(a)  use it, or hold it ready for use, in the course of carrying on a *business;

Any part of the company's client register is a CGT asset. All those parts are owned by the company and used in the course of carrying on a business. Therefore any part of its client register will be an active asset while it owns it and uses it in carrying on business.

If a CGT event happens to such an active asset (or part of the active asset) of the company, the company may be eligible for one or more of the small business CGT concessions if it satisfies the other relevant conditions set out in Division 152 of the ITAA 1997 required for each particular concession.

Active asset reduction

The active asset reduction is contained in subdivision 152-C of the ITAA 1997. To apply the small business 50% active asset reduction, you only need to satisfy the basic conditions. There are no further requirements.

In this case, we consider that the company will meet the basic conditions due to the following:

• A CGT event will occur when the company disposes of part of its client register

• The CGT event will result in a capital gain

• The company is a small business entity as its aggregated turnover is less than $2million; and

• The CGT asset satisfies the active asset test as it will have been an active asset for the entire period of ownership.

As the company satisfies the basic conditions, any capital gain from the sale of the client register that remains after applying any current year capital losses, any unapplied prior year net capital losses, is 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 company, they can choose to disregard all or part of a capital gain where all of the following conditions are met:

• the company satisfies the basic conditions contained in section 152-10 of the ITAA 1997

• the company 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 percentage 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 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 company 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 company is the percentage of:

• voting power that the entity is entitled to exercise

• any dividend payment that the entity is entitled to receive

• any capital distribution that the entity is entitled to receive, or

• if they are different, the smallest of the three definitions above.

Application to your circumstances

As discussed above, we consider that the company satisfies the basic conditions. Additionally, the company will satisfy the significant individual test as both of the shareholders are significant individuals, each holding a small business participation percentage of more than 20%. Accordingly, the company will be eligible to choose the retirement exemption in relation to the capital gain that arises as a result of the partial disposal of the client register.

Provided that the company 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 requirements for the small business retirement exemption will be met.