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Edited version of your written advice
Authorisation Number: 1012711116499
Ruling
Subject: CGT - small business retirement exemption
Question 1
Are you eligible for the small business retirement exemption pursuant to subsection 152-305(1) of the Income Tax Assessment Act 1997 (ITAA 1997) following the sale of your business and factory?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
There are three parties to this transaction:
• A
• B
• C
C operates a business.
The business leases a factory to the B.
B purchased the factory in a 50:50 joint ownership with D, who was later bought out.
C leased the property from B for a period of time.
The property was then leased to an unrelated party for a period of time.
C then re-leased the property from B and is currently leasing the premises.
C intends to sell the business in the 2015 financial year.
B intends to sell the factory in the 2015 financial year.
A intends to retire in the 2015 financial year.
The taxpayer is small, as per section 328-115 of the ITAA 1997, with a turnover less $2 million.
The net value of assets, as per section 152-15 of the ITAA 1997, is less than $6 million.
The asset is active. It has been held and used in carrying on a business, it is a required asset to conduct such business, and is held by an associate.
The asset has been an active asset for less than 15 years, and has been 100% owned for more than 50% of the ownership period.
A is a significant individual in the structure.
B distributes 100% of profit to C.
In the 2014 financial year, A received a distribution of 50%.
A is 55 or older.
Relevant legislative provisions
Income Tax Assessment Act 1997 (ITAA 1997) section 152-10
Income Tax Assessment Act 1997 (ITAA 1997) section 152-15
Income Tax Assessment Act 1997 (ITAA 1997) section 152-35
Income Tax Assessment Act 1997 (ITAA 1997) section 152-305
Income Tax Assessment Act 1997 (ITAA 1997) section 152-305
Income Tax Assessment Act 1997 (ITAA 1997) section 152-325
Reasons for decision
Any capital gain that results from a CGT event may be reduced or disregarded under the small business concessions if you satisfy certain conditions. All of these conditions require that the basic conditions in subsection 152-10(a) of the ITAA 1997 are satisfied. Some of the concessions also require that other conditions are also satisfied.
The basic conditions to be satisfied for the gain are:
(a) a CGT event happens in relation to a CGT asset of yours in an income year. The condition does not apply in the case of CGT event D1
(b) the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain
(c) at least one of the following applies:
i. you are a small business entity for the income year;
ii. you satisfy the maximum net asset value test (section 152-15 of the ITAA 1997);
iii. 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
(d) the CGT asset satisfies the active asset test (section 152-35 of the ITAA 1997).
Small business entity
You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has less than $2 million aggregated turnover.
The maximum net asset value test
The total net value of CGT assets must not exceed $6 million. This test must be met just before the CGT event that results in the capital gain. You must consider the value of net assets for yourself, connected entities, and your affiliates or entities connected with your affiliates.
The active asset test
A CGT asset must be an active asset for half the ownership period if it has been owned for 15 years or less. Alternatively, if it has been owned for more than 15 years, it must be an active asset for at least seven and a half years.
The significant individual test
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 per cent. The 20 per cent can be made up of direct and indirect percentages. A company or trust satisfies this test if it had at least one significant individual just before the CGT event.
Small business retirement exemption
If you qualify for the small business retirement exemption in subdivision 152-D of the ITAA 1997, all or part of a capital gain can be disregarded if certain conditions are satisfied.
If you are an individual, the following conditions must be satisfied:
(a) the basic conditions in subdivision 152-A of the ITAA 1997
(b) if you are under 55 just before you make the choice, you must contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund
If you are a company or trust, other than a public entity, you must also satisfy the significant individual test.
In your case, your facts indicate that you satisfy all of the elements to be eligible for the small business retirement exemption. As you are aged 55 or older, it is not necessary to contribute the proceeds from the CGT event into a superannuation fund or an approved rollover account.
Accordingly, you are entitled to apply the small business retirement exemption, as per section 152-35 of the ITAA 1997.