Edited version of your written advice

Authorisation Number: 1012989782821

Date of advice: 27 March 2016

Ruling

Subject: Capital Gains Tax - Small Business Concessions - 15 year exemption for companies

Question:

Is company A entitled to disregard any capital gain from the sale of the property under the small business concessions 15 year exemption for companies under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20WW

Relevant facts and circumstances

1. Company A is owned by a couple who each own 50% of the shares in the company and have done so for more than 15 years.

2. Company B is also owned by the same people who each own 50% of the shares in the company and have done so for more than 15 years.

3. Company A purchased a property more than 15 years ago.

4. The property was immediately occupied by Company B and used as a retail store. This use has meant that the property owned by you (Company A) is an active asset because it has been used in the course of carrying on a business that is carried on by another entity that is connected with you (Company B).

5. Company B carried on business continuously at the property from the time it was purchased until it was sold. A period of over 15 years.

6. Company A sold the property in the year ended 30 June 20XX.

7. For at least the previous few years including the year of sale of the property the turnover of both Company A and Company B has been below the $2 million threshold.

8. There are no other affiliates of Company A or Company B.

9. The retail business was disposed of a few months after the property was sold.

10. The sale of the property happened in connection with the couple's retirement. Both individuals are aged over 55.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 108-5(1)(a)

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

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

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-35

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 152-65

Income Tax Assessment Act 1997 Section 152-70

Income Tax Assessment Act 1997 Section 152-110

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

Income Tax Assessment Act 1997 Section 152-330

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 328-115

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Section 328-130

Reasons for decision

Question

Summary

Company A can disregard any capital gain from the sale of the property under the small business concessions 15 year exemption for companies.

Detailed reasoning

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 occurred when a contract of sale was entered into for the sale of the property. The CGT event will result in a capital gain, the company will satisfy the definition of a small business entity for the income year and the special conditions for passively held assets in subsection 152-10(1A) are satisfied.

Passively held assets

The legislation about passively held assets allows you to access the concessions for a CGT asset you own where you are not carrying on a business, but that CGT asset is used in the business of your affiliate or an entity connected with you. In these situations there is a special rule in regard to calculating the aggregated turnover. (The entity that is connected with you is deemed to be connected with the small business entity that uses the asset.) In this case it means the aggregated turnover of both Company A and Company B is used. You have stated that the turnover for both Company A and Company B has been below $2 million for the previous few years including the year of sale of the property.

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.

An entity is connected with another entity if:

a. either entity controls the other entity in a way described in this section; or

b. Both entities are controlled in a way described in this section by the same third entity.

An entity (the first entity) controls another entity if the first entity and its affiliates or the first entity together with its affiliates:

• if the other entity is a company - own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company.

In this case, the a couple have a 50% each ownership in Company A and a 50% ownership in Company B. Accordingly both entities are controlled by the same third entity and are therefore connected.

The property was owned by Company A for more than 15 years. The property was an active asset for more than 7.5 years as it was used in the Company B business. Accordingly, the active asset test contained in section 152-35 of the ITAA 1997 is satisfied. Therefore, the basic conditions in subsection 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.

In this case, the couple each hold a 50% direct small business participation percentage in the both companies (Company A and Company B). Accordingly, they are significant individuals and have been so, for more than 15 years as there has been no change to the shareholdings in both companies. The couple are over 55 and the sale of the property is in connection with their retirement.

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 property can be disregarded.