Edited version of your written advice

Authorisation Number: 1012906740941

Date of advice: 25 November 2015

Ruling

Subject: CGT Small Business Concessions

Question 1

Is the capital gain on the sale of the Property by the Company eligible for the Small Business Capital Gains Tax (CGT) Concessions contained in Subdivision 152 of ITAA 1997?

Answer

Yes

Question 2

Can the Company disregard the capital gain by applying the CGT Retirement exemption under Subdivision 152-D of ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

• (the Company) was incorporated in October 19XX.

• The Company has less than 50 Ordinary issued shares of $ each, held by Director (A) (%) and a private company as trustee for a Family Trust (%).

• A and B are the directors of the Company.

• The primary activity of the Company is manufacturing in Australia.

• The Company operated its manufacturing business at a property since 20YY. The Company settled the purchase of the Property in 20YY.

• A property valuation report was prepared for the property.

• The Company has sold the Property to a related entity, as custodian for a private company as trustee for a Superannuation Fund (the Superannuation Fund) in 20ZZ.

• The property was sold.

• The tax agent has calculated capital gain on the Property.

• The tax agent has provided the following information in respect of valuation of the assets of the Company and entities associated with the Company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 section 152-10

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

Income Tax Assessment Act 1997 subsection 152-10(2)

Income Tax Assessment Act 1997 section 152-15

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

Income Tax Assessment Act 1997 subsection 152-40(3)

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 subsection 328-130(1)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Summary

The Company can disregard any capital gain associated with the disposal of the property under section 152-D of the ITAA 1997 because at the time of the disposal the basic conditions for accessing the small business CGT concessions were met:

• a CGT event happened in relation to the sale of property, which is a CGT asset of the Company

• this event would (apart from Division 152 of the ITAA 1997) have resulted in a capital gain for the Company

• The property was an active asset, and

• the maximum net asset value test, as it applies to the Company was satisfied.

Detailed reasoning

Disposal of property - time of CGT event A1

Capital gains tax (CGT) event A1 happens if you dispose of a CGT asset (section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)). Subsection 104-10(3) of the ITAA 1997 provides that the time of the event is when you enter into the contract for disposal or if there is no contract when the change of ownership occurs.

An agreement for the sale of the property was entered into. This disposal means that CGT event A1 happened, apart from Division 152 of the ITAA 1997, this would amount to a capital gain in the relevant income years for the Company.

Eligibility for the CGT Small Business Concessions

According to section 152-305 of the ITAA 1997, a taxpayer can choose to disregard a capital gain under Subdivision 152-D of the ITAA 1997 if the basic conditions in Subdivision 152-A of the ITAA 1997 is satisfied.

Section 152-10 of the ITAA 1997 provides the basic conditions for Small Business CGT Concession as follows:

152-10(1) A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

(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;

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

(d) The CGT asset satisfies the active asset test (see section 152-35).

Small business entity

The term 'small business entity' has the meaning given by section 328-110

Subsection 328-110(1) of the ITAA 1997 states:

An entity is a 'small business entity' if it:

a. Carries on a business in the current year, and

b. One or both of the following applies:

v. It carried on a business in the income year (the previous year) before the current year and its aggregated turnover for the previous year was less than $2 million, an

vi. Its aggregated turnover for the current year is likely to be less than $2 million

The term 'aggregated turnover' is defined in ITAA 1997 section 328-115 as the annual turnover of a business plus the annual turnovers of any businesses it is connected with or affiliated with. An entity's aggregated turnover is the same as its annual turnover if there are no other entities it is connected with or affiliated with.

ITAA 1997 subsection 328-120(1) defines an entity's annual turnover for an income year as the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business.

'Ordinary income' is defined in ITAA 1997 section 6-5 as income according to ordinary concepts. An entity's annual turnover therefore includes all income according to ordinary concepts derived in the ordinary course of carrying on a business.

The Company's aggregate turnover for the 20VV and 20ZZ financial years was in excess of $2 million. It is unlikely that the Company's aggregate turnover will be less than $2 million for the 20WW financial year.

The taxpayer is not a small business entity.

Maximum Net Asset Test

Section 152-15 states that 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:

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

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

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

Section 328-125 provides that an entity is connected with another entity if one of the entities controls the other entity, or if the two entities are controlled by the same third entity.

Under paragraph 328-125(2)(b), control of a company will be established if an entity alone or together with affiliates beneficially own, or has the right to acquire beneficial ownership of, interests in the company with at least % of the voting power in the company.

Subsection 328-130(1) defines an affiliate as an individual or a company which acts or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.

The director holds % of the shares in the Company and has control of % of the voting power and has right to % of the distribution of income or capital from the Company. The director is therefore connected to the Company in accordance with section 328-125 of the ITAA 1997.

A company as trustee for a family trust holds % of the shares in the Company and has control of % of the voting power and has the right to receive % of any distribution of income or capital from the Company. The family trust is therefore connected to the Company in accordance with section 328-125 of the ITAA 1997.

Subsection 328-130(1) defines an affiliate as an individual or company which acts or could reasonably be expected to act, in accordance with your directions or wishes, or concert with you, in relation to the business of the individual or company.

The spouse and co-director of the Company is not an affiliate of the Company. They would only be an affiliate of the Company if it can be reasonably expected that they will act in accordance with the Company's directions or wishes or in concert with the Company, in relation to their business affairs. The example in 328-130(1) provides that a company and a director of that company would not be affiliates by virtue of a business relationship they share.

Therefore under section 152-15 the assets of the Family Trust and the Director must be taken into account for the purposes of determining the maximum net asset value of the Company.

Based on the facts provided by the Company it is accepted that at the time of the disposal of the Property the Company meets the maximum net asset test and therefore the condition set out in paragraph 152-10(1)(c) is satisfied.

Active asset test

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

• it is used (or held ready for use) in the course of carrying on a business by you, an affiliate of yours or an entity connected with you

Subsection 152-35(1) provides that a CGT asset satisfies the active asset test if:

• the taxpayer has owned the asset for 15 years or less and the asset was an active asset for a total of at least half of the period of ownership; or

• the taxpayer has owned the asset for more than 15 years and the asset was an active asset for a total for at least 7.5 years of the period for which it is owned.

The Company has owned the Property since 20YY and has operated its business from the Property continuously since 20YY. The Property is an active asset of the Company.

Conclusion basic conditions

Based on the facts provided by the taxpayer the gain on the sale of the Property satisfies the basic conditions in Subdivision 152-A of the ITAA 1997.

Subdivision 152-D Small business retirement exemption

Under the retirement exemption in Subdivision 152-D, a taxpayer may choose to disregard all, or part of, a capital gain if the capital proceeds from the CGT event if all the basic conditions in Subdivision 152-A are satisfied.

Subsection 152-305(2) states as follows:

A company or trust (except a public entity-see subsection (3) can also choose to disregard such an amount if:

(a) the basic conditions in subdivision 152-A are satisfied for the capital gain; and

(b) the entity satisfies the significant individual test (see section 152-50); and

(c) the company or trust conditions in section 152-325 are satisfied.

Section 152-50 states that an entity satisfies the significant individual test if the entity had at least one significant individual just before the CGT event.

In accordance with section 152-55 of the ITAA 1997 an individual is a significant individual in a company if they have a 'small business participation percentage' in the company of at least 20%. '

The Director owns % of the Company and therefore satisfies the significant individual test.

Subsection 325(1) requires a company or trust to make a payment to at least one of its CGT concession stakeholders if the company or trust receives an amount of capital proceeds from a CGT event for which it makes a choice under Subdivision 152D.

Paragraph (a) of the definition of CGT concession stakeholder in section 152-60 states a significant individual in a company or trust is a CGT concessional stakeholder.

Section 152-310 states that a choice has to be made by the individual, company or trust for the CGT exempt amount to be disregarded.

According to section 152-300, you can choose to disregard a capital gain from a CGT event happening to a CGT asset of your small business if the capital proceeds from the event are used in connection with the retirement of your significant individuals.

According to section 152-315 where the taxpayer is a company the amount chosen cannot exceed the CGT retirement exemption limit for each individual for who the choice is made.

As you satisfy all the conditions, you are entitled to the retirement exemption under subsection 152-305(2).

Conclusion

Based on the facts provided by the taxpayer the conditions contained in section 152 of the ITAA 1997 are satisfied relating to the disposal of the property on the 18 September 2015. Therefore, the Company can disregard any capital gain arising from the sale of the Property and is entitled to use the small business retirement exemption concession under Subdivision 152-D.