Edited version of your written advice

Authorisation Number: 1012821468100

Ruling

Subject: Small business concessions

Question 1

Are you eligible to disregard any capital gain made on disposal of the asset under the CGT 15-year exemption concession for small business?

Answer

No.

Question 2

Are you entitled to use the retirement exemption under subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997)?

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

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The partnership commenced trading during the 19AA-BB financial year.

The partnership was split.

The company bought the assets and took over the clients of the partnership.

The company was registered and commenced trading during the 20CC-20DD financial year.

The company was a small business entity.

The partners were the only directors and equal shareholders of the company.

During 20XX, one of the directors received treatment for a medical condition.

During the 20XX-YY financial year, the company sold its client list and stock.

The directors are over 55 years of age.

The directors have not previously disregarded a capital gain under the retirement exemption.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-50.

Income Tax Assessment Act 1997 Section 152-60.

Income Tax Assessment Act 1997Subdivision 152-A.

Income Tax Assessment Act 1997 Section 152-110.

Income Tax Assessment Act 1997 Subdivision 152-D.

Income Tax Assessment Act 1997 Section 152-305.

Income Tax Assessment Act 1997 Section 152-310.

Income Tax Assessment Act 1997 Section 152-315.

Income Tax Assessment Act 1997 Section 152-320.

Income Tax Assessment Act 1997 Section 152-325.

Reasons for decision

Summary

You are not entitled to apply the 15-year exemption to the capital gain on the sale of the client list. However, you are entitled to apply the retirement exemption.

Detailed reasoning

15-year exemption

Section 152-110 of the ITAA 1997 provides a small business 15-year exemption for companies and trusts. Under this section, a company can disregard the capital gain from the disposal of a CGT asset if:

(a) the company satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions

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

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

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

i. at least 55 years old at that time and the event happened in connection with their retirement or

ii. permanently incapacitated at that time.

In this case, the company did not own the client list for 15 years. Therefore, you are not entitled to apply the 15-year exemption.

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

• 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 percent 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); and

• the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less.

If a CGT concession stakeholder is under 55 years old just before receiving a payment, an amount equal to that payment must be immediately paid to a complying superannuation fund or retirement savings account (RSA) on their behalf. The company or trust must notify the trustee of the fund or the RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption.

There is no requirement to make this contribution if the stakeholder was 55 years old or older.

Section 152-50 of the ITAA 1997 states that an entity satisfies the "significant individual" test if the entity had at least one significant individual before the CGT event. An individual is a "significant individual" in a company if the individual has at least a 20% small business participation percentage in the company.

Section 152-60 of the ITAA 1997 provides that an individual is a CGT concession stakeholder of a company or trust at a time if the individual is a significant individual in the company.

The consequence of choosing the retirement exemption (section 152-305 of the ITAA 1997) for any part of the capital gain from the CGT asset is that, that part of the capital gain which equal to its CGT exempt amount is disregarded (subsection 152-310(1) of the ITAA 1997). Additional conditions are stated in subsection 152-310(2) of the ITAA 1997.

The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment.

The payment to the CGT concession stakeholders must be made by the later of seven days after making the choice or seven days after you receive the capital proceeds from the relevant CGT event.

Under section 152-320 of the ITAA 1997, 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.

A company or trust may determine the percentage of the exempt amount attributable to each stakeholder, having regard to each stakeholder's retirement exemption limit (or remaining limit).

In this case, you are a small business entity who sold the assets of the business. The directors are significant individuals in the company as they have a small business participation percentage of at least 20%. The directors are also CGT concession stakeholders of the company. The directors are aged over 55 years of age and haven't used any of their CGT retirement exemption limit.

Therefore, the company is entitled to apply the retirement exemption to disregard all or part of a capital gain up to each of the individuals CGT retirement exemption limit.

Note: If the company makes the choice to apply the retirement exemption it must be made in writing and comply with the other requirements contained in section 152-315 and 152-325 of the ITAA 1997 explained above. Additionally, a payment of the exempt amount will need to be paid within seven days of making the choice (or within seven days of receiving the proceeds if this is later). As the directors are over 55 years of age, there is no requirement that this payment is made to a complying superannuation fund.