Edited version of your written advice

Authorisation Number: 1012867044260

Date of advice: 27 August 2015

Ruling

Subject: Capital Gains Tax

Question 1

Is the company eligible for the 15 year exemption in relation to the sale of the business?

Answer

Yes.

Question 2

If the capital gain is disregarded, can the proceeds be distributed to the significant individuals and not be included in their assessable income, even if only X of the X significant individuals are retiring?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

The company purchased the business in XXXX and has owned and operated the business continuously since then.

The company is considering the business.

The company is owned 50% by A and 50% by B.

Each shareholder owns X share and the shares rank equally in terms of entitlements to dividends, capital and voting rights.

These shareholdings have been the same for 15 years.

A has no other assets and is effectively a dormant entity.

The shares in A are owned 50% by C and 50% by D.

Each shareholder owns X shares, and the shares rank equally in terms of entitlements to dividends, capital and voting rights.

The shareholding has been the same for the last 15 years.

Both C and D are over the age of 55.

C is a managing director of the company and the general manager of the business.

Upon a successful sale, C and D would retire using the proceeds from the sale of the business.

E will receive 100% of the distribution from B in the CGT event year.

E is over the age of 55.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 subdivision 152-C

Income Tax Assessment Act 1997 section 152-75

Income Tax Assessment Act 1997 section 152-35

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

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 paragraphs 152-125

Income Tax Assessment Act 1997 subsection 152-70(1)

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-55

Reasons for decision

Detailed reasoning

Question 1

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:

(a) a CGT event happens in relation to an asset that the taxpayer owns

(b) the event would otherwise have resulted in a capital gain

(c) one or more of the following applies

(i) the taxpayer satisfies the maximum net asset value test

(ii) the taxpayer is a "small business entity" for the income year

(iii) the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or

(iv) the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year, and

(d) the asset satisfies the active asset test.

In this case a CGT event will occur when the business is sold. The CGT event will result in a capital gain as the capital proceeds are expected to exceed the cost base of the asset. Additionally, the company is a small business entity for the income year.

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if:

• 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 test period detailed below, or

• you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period.

The test period:

• begins when you acquired the asset, and

• ends at the earlier of

• the CGT event, and

• when the business ceased, if the business in question ceased in the 12 months before the CGT event (under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months).

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

In this case, the business was owned by the company for more than 15 years. The asset was an active asset for more than 7.5 years as it was used in the company's business. Accordingly, the active asset test contained in section 152-35 of the ITAA 1997 is satisfied. Therefore, provided the CGT event results in a gain, the basic conditions in 152-10(1) of the ITAA 1997 will be satisfied.

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:

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

- permanently incapacitated at that time.

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.

Small business participation percentage

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

• the entity's direct small business participation percentage in the other entity at that time, and

• the entity's indirect small business participation percentage in the other entity at that time.

Under subsection 152-70(1) of the ITAA 1997 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, or

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

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

Section 152-75 of the ITAA 1997 details that an entity's indirect small business participation percentage in a company or trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity, and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.

In this case, C and D have indirect participation percentages in the company of X% each. Accordingly, they are significant individuals and have been so for 15 years as there was no change in shareholdings. Both C and D are over the age of 55 and will retire as a result of the sale.

E will have an indirect participation percentage in the company of X%. Accordingly, they will be a significant individual in the year when the CGT event occurs. E will not be retiring as a result of the sale.

Having regard to the full circumstances, the company satisfies the conditions set out in Section 152-110 of the ITAA 1997 and the capital gain from the sale of the asset can be disregarded.

Question 2

Section 152-60 of the ITAA 1997 defines an individual as a CGT concession stakeholder of a company or trust 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 or trust at that time that is greater than zero. It has already been established that C, D and E are significant individuals and therefore CGT concession stakeholders.

Section 152-125 of the ITAA 1997 allows a CGT concession stakeholder to receive an exempt amount from the company or trust where a company or trust has claimed the small business 15-year exemption, if these following conditions are satisfied:

• 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 concession 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.

The CGT concession stakeholder's control percentage is, for a company or a trust (where entities have entitlements to all the income or capital of the trust), the stakeholder's small business participation percentage in the company or trust just before the CGT event.

C, D and E are CGT concession stakeholders and are entitled to an exempt amount if the above conditions are met. The exemption amount is not included in the assessable income of the CGT concession stakeholder and is not deductible to the company or trust.

Section 152-125(3) of the ITAA 1997 imposes a limit on the payments that may qualify under section 152-125(2) of the ITAA 1997. That provision applies only to the extent that the total of the payments made by the company or trust to a particular CGT concession stakeholder for an exempt amount does not exceed the following limit:

Stakeholder's participation percentage x exempt amount

Provided that the conditions above are met the proceeds can be distributed to the significant individuals and not be included in their assessable income.There is no condition requiring all CGT concession stakeholders to retire, as long as there is at least one significant individual retiring.