Edited version of your written advice

Authorisation Number: 1012790357305

Ruling

Subject: Small Business CGT 15-year exemption for companies and payments to the company's CGT concession stakeholder

Question 1

Will the entity be entitled to disregard a capital gain to be made on the sale its assets under the Small Business Capital Gains Tax 15-year exemption under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

As a capital gain made on the sale of the entity's assets can be disregarded by the entity under section 152-110 of the ITAA 1997, can a subsequent payment made to an individual after the relevant CGT event be disregarded provided all conditions under section 152-125 of the ITAA 1997 have been met?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

The entity operates a business.

The assets used in the business were purchased over 15 years ago. Since the purchase of the assets the individual has continually operated his business from those premises. As part of the individual's retirement plans, the entity is looking to sell the assets.

The turnover of all businesses was less than $2,000,000.

The net assets of the entity and associated entities are less than $6,000,000.

You have identified that you had a small business participation percentage in the entity of over 20%.

You are over 55 years of age and intend to retire.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 152-10(1)

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-50

Income Tax Assessment Act 1997 Subsection 152-35(1)

Income Tax Assessment Act 1997 Subsection 152-35(2)

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Subsection 152-40(1)

Income Tax Assessment Act 1997 Section 152-50

Income Tax Assessment Act 1997 Section 152-55

Income Tax Assessment Act 1997 Section 152-110

Income Tax Assessment Act 1997 Subsection 152-110(1)

Reasons for decision

Question 1 - 15 year exemption for companies and trusts

A small business entity can disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met.

Section 152-110 of the ITAA 1997 discusses the 15-year exemption for companies and trusts.

Subsection 152-110(1) of the ITAA 1997 states an entity that is a company or trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a) the basic conditions set out under Subdivision 152-A are satisfied for the gain;

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

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

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

(i) was 55 or over at that time and the event happened in connection with the individual's retirement; or

(ii) was permanently incapacitated at that time.

Basic Conditions

In order to be eligible for the small business CGT concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997 as follows:

(a) a CGT event happens in relation to a CGT asset of yours in an income year

(b) the event would (apart from this Division) 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

(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; or

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year, and

(a) the CGT asset satisfies the active asset test.

Maximum Net Asset Test

Section 152-15 states you satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000:

(a) the net value of the CGT assets of yours;

(b) the net value of the CGT assets of any entities connected with you;

(c) the net value of the CGT asset of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).

Significant Individual

Section 152-55 of the ITAA 1997 states an individual is a significant individual in a company or a trust at a time if, at that time, the individual has a small business participation percentage in the company or trust of at least 20%.

Small Business Participation Percentage

Section 152-65 of the ITAA 1997 states an entity's small business participation percentage in another entity at a time is the percentage that is the sum of:

(a) the entity's direct small business participation percentage in the other entity at that time; and

(b) the entity's indirect small business participation percentage in the other asset at that time.

Active Asset Test

Section 152-40 of the ITAA 1997 outlines the meaning of the term "active asset".

Subsection 152-40(1) of the ITAA states a CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

(b) If the asset is an intangible - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

Section 152-35 outlines the active asset test.

Subsection 152-35(1) states a CGT asset satisfies 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 period specified in subsection (2); 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 71/2 years during the period specified in subsection (2).

Subsection 152-35(2) states the period:

(a) begins when you acquired the asset; and

(b) ends at the earlier of:

(i) the CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

In this case the basic conditions have been met as follows:

(a) when the entity sells the assets a CGT event will occur

(b) it is envisaged that a capital gain will be made from the sale

(c) the entity satisfies the maximum net asset value test as the net value of the CGT assets of yours, any entities connected to you and any affiliated of yours or entities connected with your affiliates does not exceed $6,000,000.

The assets are active assets and meet the active asset test because:

(a) they are owned by the entity

(b) they have been used by the entity in the course of it carrying on its business

(c) the entity has owned the assets for over 15 years and they were active assets for more than 71/2 years during that period

The basic conditions have therefore been met.

The other conditions under subsection 152-110(1) have also been met as follows:

(a) you meet all the conditions to be a significant individual.

(b) you have been a significant individual for more than 15 years; and

(c) you will be over 55 years old at the time of the sale of the assets and the sale will happen in connection with your retirement.

As all conditions under subsection 152-110(1) have been met the company can disregard any capital gain arising from the sale of the assets (the CGT events).

Question 2 - Small Business 15-year exemption - payments to company's concession stakeholders

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 concession stakeholder (and it is not deductible to the company or trust) if certain conditions are met as follows:

(a) 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;

(b) the payment must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event; and

(c) 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.

In this case upon the sale of assets the capital gain entity by the company will be disregarded. Any distributions of that exempt amount to the individual will not be included in his assessable income provided:

(a) the payment is made from the entity to him within 2 years after the CGT event

(b) the individual is a concession stakeholder; and

(c) the total payments made to the concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholder's control percentage (over 20%) by the exempt amount.