Edited version of private advice

Authorisation Number: 1051621627399

Date of advice: 9 January 2020

Ruling

Subject: CGT small business 15 year exemption - extension of time to make payment

Question

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

Answer

Yes

Question

Will the Commissioner extend the time limit in paragraph 152-125(1)(b) of the Income Tax Assessment Act 1997 (ITAA1997) in accordance with subsection 152-125(4), so that the payments made to a capital gains tax (CGT) concession stakeholder can be disregarded under subsection 152-125(2)?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

The company has been trading for more than 15 years.

The company was controlled by a sole director and a shareholder who was more than 55 years old and retired on the day of the CGT event.

The net value of the CGT assets' of the Company, including its affiliates and connected entities, as of CGT event date was less than $6 million.

The business was sold as a going concern and it was agreed to receive the sale price of the business goodwill in instalments for more than two years.

The sales contract was not signed.

The CGT concession stakeholder passed away a few months after selling the business.

The payment dispute

The Purchaser notified you in writing of their payment dispute.

The letter stated the total amount that was paid and the outstanding balance from the sale price.

However, the Purchaser claimed that you now owe them an amount which is more than the outstanding balance. This amount is the sum of assumed liabilities and payments made by the Purchaser on your behalf.

The Purchaser claimed that payments for certain provisions are the Vendor's responsibilities pursuant to an earlier agreement. The unsigned sales contract did not reflect that condition.

With an amount owing from the Purchaser, they stated that they do not intend to make further payments and proposed finalisation of the business sale transactions.

Request for an extension of time

The legal representatives for the Vendor and Purchaser have started dispute resolution.

You submitted that the capital gains amount may be altered as a result of the current negotiations.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 subsection 152-125(1)

Income Tax Assessment Act 1997 paragraph 152-125(1)(b)

Income Tax Assessment Act 1997 subsection 152-125(2)

Income Tax Assessment Act 1997 subsection 152-125(4)

Reasons for decision

Summary

You are entitled to disregard any capital gain made on the disposal of your business under the small business 15 year exemption concession. The Commissioner allows for the payment of the exempt amount to be made to the significant individual by the date requested.

Detailed reasoning

15 year exemption

The rules covering the small business 15 year exemption are contained in Subdivision 152-B of the ITAA 1997. If you qualify for the small business 15 year exemption you can entirely disregard the capital gain you make from the disposal of a capital gains tax (CGT) asset and do not need to apply any other concessions. In addition, you do not have to apply capital losses against your capital gain before applying the exemption.

Under section 152-110 of the ITAA 1997, a company can disregard the capital gain made on the disposal of a CGT asset if the company:

• satisfies the basic conditions for the small business CGT concessions in Subdivision 152-A of the ITAA 1997 for the gain
• continuously owned the CGT asset for the 15 year period ending just before the CGT event
• had a significant individual for a total of at least 15 years (even if it was not the same significant individual during the whole period) during which the company owned the CGT asset; and
• an individual who was a significant individual of the company just before the CGT event was either:

­   55 or over at the time and the event happens in connection with the individual's retirement, or

­   permanently incapacitated at the time.

In your case, the basic conditions contained in Subdivision 152-A of the ITAA 1997 were satisfied because:

­     a CGT event occurred when you sold the goodwill of the company

­     the event resulted in a gain

­     you satisfied the maximum net value asset test at the time of the event, and

­     you operated the business continually for more than 15 years

In addition, just before the CGT event:

­     you had a significant individual for the entire ownership period of the accounting practice, and

­     the significant individual, who was more than 55 years old, has decided to retire.

The company qualifies for the small business 15 year exemption in section 152-110 of the ITAA 1997.

Extension of time

Section 152-125 of the ITAA 1997 provides that, if a capital gain made by a company is disregarded under the small business 15 year exemption, or would have been except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985, any distribution made by the company of that exempt amount to a CGT concession stakeholder is not included in the assessable income of the CGT concession stakeholder, and not deductible to the company, if the following conditions are satisfied:

·        the company makes 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 is made to an individual who was a CGT concession stakeholder of the company just before the CGT event; and

·        the total payments made to each CGT concession stakeholder does not exceed an amount determined by multiplying the CGT concession stakeholders control percentage by the exempt amount.

The Commissioner may exercise his discretion under subsection 152-125(4) of the ITAA 1997 and allow further time to make payments to the concessional stakeholder taking into account the individual circumstances and commercial practices of each case. The range of factors that the Commissioner will consider in allowing an extension of time includes:

a) whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension;

b) whether there is any prejudice to the Commissioner if the additional time is allowed (however, the mere absence of prejudice is not enough to justify the granting of an extension);

c) whether there is any unsettling of people, other than the Commissioner, or of established practices;

d) the need to ensure fairness to people in like positions and the wider public interest;

e) whether there is any mischief involved; and

f) the consequences of the decision.

Application to your circumstances

There are two reasons why you are unable to make a payment of the full exempt amount to the CGT concession stakeholder by the end of the two years after the CGT event.

First, the capital proceeds were to be received in instalments for more than two years.

Second, there has been an unexpected delay in the company receiving the balance of the capital proceeds. This delay is due to disputes which arose between the vendor and the purchaser.

It is accepted that the dispute resolution process may take a while considering the disputed amount is a significant portion to the sale price. Having considered the relevant circumstances, the Commissioner will exercise his discretion and extend the two year time limit under subsection 152-125(4).