Edited version of private advice

Authorisation Number: 1051554331166

Date of advice: 26 July 2019

Ruling

Subject: Capital gains tax - small business concessions

Question 1:

Is the land (the Property) considered to be an active asset under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes. Based on the information and documentation provided, you satisfy the active assets test as Company A had used the Property for at least 7.5 years in the course of carrying on a business and the exceptions do not apply.

Further information can be found by searching 'QC 52271' on www.ato.gov.au.

Question 2:

Is the taxpayer eligible to access the 15 year exemption to disregard the capital gain made on the sale of the Property?

Answer:

Yes. Based on the information provided the conditions contained in Subdivisions 152-A and 152-B of the ITAA 1997 have been met and any capital gain made on the sale of the Property can be disregarded.

Further information can be found by searching "QC 52288' on ato.gov.au.

Question 3:

Will the Commissioner's discretion be exercise under subsection 152-125(4) of the ITAA 1997 to allow an extension of time for the payment of the exempt amount out to a capital gains tax (CGT) Concession Stakeholder?

Answer:

Yes. Based on the information provided the Commissioner will exercise their discretion to extend the two year time limit stipulated in subparagraph 152-125(1)(b)(i) of the ITAA 1997 for the payment of the exempt amount to be made to the CGT stakeholder.

This ruling applies for the following period:

Income year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You

You were registered in 19XX and whose only asset is the Property.

Your Memorandum of Association provides the following information:

·        you are a proprietary company;

·        your directors were Persons X and Y who each held redeemable preference share/s;

·        the ordinary shares give the holders the following rights;

˗        to vote at General meetings;

˗        to receive dividends, distributions, bonuses and other profits; and

˗        on the winding up, to participate pari passu with the other holders of ordinary shares in your surplus assets.

Your current director is Person A who was appointed as director in 19XX.

Your current ordinary share shareholders are as follows:

·        XX% - Company B;

·        XX% - Company C; and

·        XX% - Company D.

The following are entities that are connected to you:

·        Company A, which is XX% owned by Company B. Person A is a director of both companies and owns the shares in Company B;

·        Company E, which is owned XX% by Company B;

·        Company F, in which Person A is a director and has a XX% ownership interest, which is the corporate trustee of Trust A, in which Company B owns XX% of the units;

·        Company D, in which Person A has a XX% ownership interest, which is the corporate trustee of Trust B, which a discretionary trust, with no ownership interest/s or distributions having been made; and

·        Person A.

Person A has been your significant individual during the period you owned the Property.

You were not carrying on a business during the 2016-17 income year.

The Property

You entered into a contract to purchase the Property in 19XX.

The title of the Property was transferred to you in the following year.

The Property has a land area of less than 5 hectares on which the following was located:

·        a house located on a portion of the Property with a fence surrounding it which had a yard around it with a land area of less than 2 hectares (House lot);

·        a separate commercial building (the Original Building) on a portion of the Property that was intended for use as an eatery; and

·        the remaining portion of the Property being vacant land.

The house was rented out. The yard and shed, with a land area of XX metres square attached to the house were used to store trucks and equipment for Company E. It is estimated that around XX% of the House Lot was used for business storage and around XX% of the House Lot being used as follows:

·        for XX years following the transfer of the title - occasional use of shed and truck parking; and then

·        for X years until late 20XX - intensive use of shed and truck parking.

·        It is estimated that Company E's use of the Property from late 20XX to late 20XX was X% of the total land area.

The Original Building commenced being used as office space by you prior to the title of the Property being transferred into your name. A number of months later it was rented out to the third party for use as an eatery, and was then rented out to third parties until late 20XX.

XX% of the Property was fenced off with a building being constructed for use as a showroom and office space by Company A, being the Trading Premises. Company A commenced trading from the Property for X year until late 2015 (as outlined below).

In late 20XX, you entered into an agreement for the lease of the land (the Agreement to Lease) with Person B, the director of Company X, for a specified period subject to conditions which involved the tenant obtaining all relevant planning permits and approvals to develop the Property, which was anticipated to be within X years of the date of the lease.

A number of years after the Agreement to Lease was entered into, Person A met with Person B and Person C, the Chief Executive Officer of Company Y, when discussion about entering into a Development Agreement was discussed (as discussed below).

After a number of years Company A ceased trading in late 20XX, and the tenants in the house and eatery vacated. Company commenced using the Original Building for office space.

From early the following year until part way the following year Company A used the shed and the House Lot for vehicle and other equipment storage, using an area previously used by Company A.

Early 20XX Company A moved out of the Trading Premises and began using the house for their office space to continue the process of winding up the business while continuing to use the Trading Premises and surrounding yard for the storage of machines and stock.

In 20XX you entered into a contract for the sale of the Property to for the sale price of $X,XXX,XXX (Goods and Services Tax inclusive).

A short-term licence agreement was prepared between you (the Licensee) and the purchasers of the Property (the Grantor) with You (Licensee which includes its employees, agents and invitees) for the use of part of the Property consisting of the house, and the land immediately surrounding it, for the purpose of using it as an office/depot and storage of vehicles until 20XX which included the following information:

·        the Licensee sold the Property to the Grantor with vacant possession; and

·        the licensed area if the part of the Property comprising the house, and land immediately surrounding it, as occupied by the Licensee on the date of this licence.

In early 20XX, Companies A and E moved off the Property in accordance with the licence agreement.

Development of the Property

A number of years prior to the Property being sold Person A had entered into an Asset Development Agreement (ADA) on your behalf with Company Y for the purposes of constructing a mixed use development on the Property, including supermarket and retail shops. The ADA you included the following information:

During the same month a loan agreement was entered for the amount of $X,XXX,XXX, plus interest and fees, between Company Z, being the Lender, and you, being the Borrower. The purpose of the loan was to act as a bridging facility prior to the establishment of a land and construction facility (the Bridging Loan). The term of the loan was for a number of months, or as agreed by all of the parties of the loan agreement. Person A signed on your behalf and was listed as the guarantor.

During the following year Company H (then called Company Y) entered into a Business Sale Agreement with Company Y under which Company H would purchase the assets of Company Y, which included the benefits provided under the ADA in respect of the Property.

In the same month another loan agreement was entered into for the amount of $X,XXX,XXX plus interest and fees between Company Z, the Lender, and you, the Borrower. The loan was split into a number of tranches, with some of the funds being used to fund the fees and costs incurred at that point in relation to the planned retail development at the Property, and other funds to be used to fund the fees and costs incurred up to that point in relation to the planned development at the Property and refinance the Bridging Loan. Person A signed on your behalf and was listed as the guarantor.

In accordance with the ADA, Company H received an advance of $XX,XXX from Company Z during the same month which was secured by a mortgage over the Property.

In accordance with the ADA, Company H received $X.XX million from Company Z in the following year which was secured by a mortgage over the Property.

During the same month an Amended and Restated Loan Agreement was signed for the amount of $X,XXX,XXX plus interest and fees, between Company Z and you, under which the amount would be split into a number of tranches with the loan amount and all accrued interest to be repaid by a specified date that year, or as agreed by all of the parties to the loan. Person A signed on your behalf as was listed as the guarantor.

After a number of months Company H guaranteed to make specified payments to you.

During the same month the sale proceeds from the sale of the Property were remitted to Company H.

The following month the title of the Property was transferred to the Purchasers as agreed in exchange for $XX,XXX consideration paid to you.

You commenced legal action against Company H and Others in relation to civil fraud and breach of fiduciary duties to recover the amount of $X.X million, plus interest and costs.

The legal action is still ongoing and has not been finalised at this point.

Person A

Person A has been your director since the year you were incorporated.

Person A employed their child, Person D as your General Manager and associated businesses a number of years before the sale of the Property occurred and commenced reducing their active role in relation to them.

Person A had commenced receiving a pension from their self-managed superannuation fund prior to the sale of the Property and planned to use the funds from the sale of the Property to top up their financial position in their retirement.

Person A undertook the following activities during the income years prior to the sale of the Property for around X hours per day, X days per week, with occasional weekends specifically in relation to Company A:

·        20XX-XX income year - Person A was being treated for a medical condition and was working significantly less than earlier income years, splitting their time equally between Company A and Company E. They received a payment summary of $XX,XXX from Company E;

·        20XX-XX income year - Person A worked at Company A in sales and administrative roles and Company E driving trucks and harvesting manure. They received a payment summary of $XX,XXX from Company E;

·        20XX-XX income year - Person A worked at Company A for the majority of the time with the other time spent at Company E. They received a payment summary of $XX,XX from Company E;

·        20XX-XX income year - Person A worked for both Company A and E, with Company A closing its retail shop after which Person A continued to sell remaining stock and equipment and collect amounts from debtors. They received a payment summary of $XXX from Company A;

·        20XX-XX income year - Person A undertook activities in relation to the final winding up and sale of equipment of Company A in addition to undertaking a small amount of administration activities for Company E. They did not receive any payment summaries.

Person A's intention was to retire when the Property was sold, which they have done, with no intention or ability to re-commence working.

The sale of the Property was undertaken to allow for the development of the Property to proceed with the sale amount to be injected into Person A's superannuation or personal accounts to fund their retirement through investments.

Person A has not been gainfully employed by any entity, related to them or otherwise, since the sale of the Property.

Person A was the significant individual for you just before the sale of the Property and was over 55 years of age when the Property was sold.

Company A

Company A operated a business and commenced trading from the Property from late 20XX, using XX% of the Property for its operations.

Company A closed its doors to the public around 15 years after it had commenced trading and had sales of $XXX,XXX as at that point during the income year in which it ceased trading.

Company A had an estimated aggregated annual turnover of less than $2 million in the income year in which it ceased trading.

Following the final day of trading, Company A continued to:

·        sell remaining stock and various items of plant and equipment, with the last sale of plant and equipment occurring in the income year in which the Property was sold;

·        collect money from debtors which continued until the income year in which the Property was sold;

·        make payments to creditors; and

·        undertaking employee administration activities in relation to superannuation and workers compensation.

Debtor amounts owing to Company A were collected and equipment and remaining stock was sold during the two years after Company A had ceased trading, with the Trading Premises and attached yards being used to store equipment and stock until sold.

Company A did not trade during the income year in which the Property was sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment act 1997 Subdivision 152-B