Edited version of your written advice

Authorisation Number: 1013024887839

Date of advice: 27 May 2016

Ruling

Subject: Small business CGT concessions

Question 1

Does the Taxpayer qualify for the small business 15-year retirement exemption under Subdivision 152-B of the Income Tax assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

1 July 20XX to 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Taxpayer is incorporated.

The Owner of the Taxpayer is over 60 years old and is planning to retire.

The Owner has been the sole director and secretary since the Taxpayer incorporated.

The Taxpayer has operated out of the same business premises continuously.

From time to time part of the building the Taxpayer owns has been rented out to third parties.

The Taxpayer has received an offer and is considering selling its business and the property.

In the 20XX income year there were two other entities controlled by the Owner:

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 152-A

Income Tax Assessment Act 1997 subdivision 152-B

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 section 328-110

Reasons for decision

Small business 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 or trust can disregard the capital gain from the disposal of a CGT asset if: 

(a) the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain;

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

(c) the entity 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 entity owned the CGT asset;

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

• was 55 or older at that time and the event happened in connection with the individual's retirement; or

• was permanently incapacitated at that time.

Small business concessions - basic conditions in Subdivision 152-A

Section 152-10 of the ITAA 1997 set out the basic conditions for the small business CGT concessions. The basic conditions to be satisfied are:

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

(b) the event would (apart from the concessions applying) have resulted in a capital gain (except a gain from CGT event K7);

(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 rules in subsection 152-10(1A) or 152-10(1B) regarding passively held assets of connected affiliates or entities or partnerships are satisfied in relation to the CGT asset in the income year;

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

Application to your circumstances

(a) a CGT event will happens in relation to a CGT asset that you own in an income year.

(b) the event would result in a capital gain;

(c) at least one of the following applies:

(i) Basically you are a small business entity if you carry on a business in the current year and your aggregated turnover is less than $2 million. (Section 328-110 of the ITAA 1997)

There are 3 ways an entity can satisfy section 328-110 of the ITAA 1997 to be considered a small business entity:

• Entity's aggregated turnover for the previous income year was less than $2 million (Test 1);

• Entity's aggregated turnover for the current income year, worked out as at the first day of the income year, is likely to be less than $2 million (Test 2); or

• Entity's aggregated turnover for the current income year, worked out as at the end of the current income year is actually less than $2 million (Test 3).

Aggregated turnover is your annual turnover plus the annual turnovers of any business entities that are your affiliates or that are connected with you.

In the 20XX income year, the Taxpayer was connected to two other entities under section 328-125 of the ITAA 1997. The three entities were all 100% owned and controlled by the Owner.

Based on the information provided and the facts of this case the Taxpayer would not be considered a small business entity as their aggregated turnover in the previous income year was greater than $2 million.

You have not asked the Commissioner to consider whether you satisfy Test 2 or Test 3.

(ii) You satisfy the maximum net asset value test if, just before the CGT event, the net value of assets of you and certain entities you own do not exceed $6million (section 152-15 of the ITAA 1997).

Based on the information provided, you would not pass the maximum net asset value test which requires net value of the entity not to exceed $6 million just before the test.

(iii) You are not a partner in a partnership and you are not disposing of a passive asset, therefore this subparagraph does not apply.

(iv) This subparagraph does not apply.

As none of the subparagraphs in paragraph 152-10(c) of the ITAA 1997 apply, you do not satisfy the small business basic conditions contained in section 152-10, therefore you are not able to access the 15 year exemption under section 152-110.