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Edited version of private advice
Authorisation Number: 1051716679998
Date of advice: 15 July 2020
Ruling
Subject: Capital gains tax - small business concessions
Does the Taxpayer satisfy the basic conditions for the small business concessions under Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer:
Yes. Based on the information provided, the Taxpayer has satisfied the basic conditions under section 152-10 of the ITAA 1997, as:
¢ it was a small business entity at the time of CGT event; and
¢ the asset was connected to the Business that operated for more than 15 years.
Further information can be found by searching 'QC 52266' on ato.gov.au.
Question 2:
Is the Taxpayer eligible to apply the small business 15-year exemption under Subdivision 152-B of the ITAA 1997 to the capital gain made on the sale of the Business?
Answer:
Yes. Based in the information provided you have met the conditions to be eligible to apply the 15-year exemption to the capital gain made on the sale of the Business for the following reasons:
¢ The Taxpayer has satisfied the basic conditions in Subdivision 152-A of the ITAA 1997
¢ In accordance with the application of the principles contained in TD 2004/44 the Taxpayer is viewed as having acquired the Business at the same time as Company A had originally acquired it, being in more than 15 years earlier
¢ Company A had a significant individual during the period it owned the asset until the restructure occurred, and the Taxpayer had the same significant individual during the period it owned the asset until the Business was sold, totalling more than 15 years
¢ The significant individual was over 55 years of age when the capital gains tax event occurred, which happened in relation to their retirement; and
¢ A capital gain was made on the sale of the asset.
Further information can be found by searching 'QC 52288' on ato.gov.au.
This ruling applies for the following periods
Income year ending 30 June 2020
Income year ending 30 June 2021
Income year ending 30 June 2022
The scheme commences on
1 July 2019.
Relevant facts and circumstances
Background
Company A was incorporated and commenced operating a business (the Business), with Person A being the director of Company A.
Company issued ordinary shares that were held equally by Person A and Person B.
After several years Company A issued Person A a different class of share.
The main capital gains tax asset of the Business is goodwill, acquired when the Business commenced, and some plant and equipment and other business assets (Business assets).
More than 20 years later the Taxpayer acquired all the shares in Company A as part of a group restructure.
The Business continued to be carried on in the same manner following the restructure.
Person A is the sole director of the Taxpayer.
A discretionary trust (the Trust) holds 100% of the shares in the Taxpayer and does not carry on a business or undertake any other activities other than holding the Taxpayer's shares.
Shortly after the restructure, the Taxpayer, Company A and Company X made the choice to form a tax consolidated group, with the Taxpayer being the head entity.
The Business continued to be carried on in the same manner following the consolidation.
Company X employed staff and charged service fees to Company A for a period after the consolidation until Company X applied for voluntary administration and the staff are now employed by Company A.
The Trust has made the following distributions:
|
Income year |
Distributions |
|
2018-19 |
The Trust made the following distributions: ¢ $XXX,000.00 of net income to Person B ¢ The balance of net income to Person A |
|
2019-20 |
The Trust distributed 100% of its net income and/or capital to Person A |
The total annual consolidated turnover of the Taxpayer is estimated to be less than $2 million in the 2017-18- and 2018-19-income years.
Sale of the Business
Company A has entered into a Terms Sheet for the sale of the Business to an unrelated third party for the sale of the Business, with settlement to occur on a specified date, or at such later date as the parties mutually agree.
Under the terms of the sale, Person A will be required to work on a part-time basis in the Business for at least XX months to assist with the transition restricted to retaining of existing client portfolio their transition to the purchaser.
The Term Sheet outlines that the sale price for goodwill of the Business is $X,XXX,XXX.00 that could be adjusted to be either increased or decreased, referred to as 'rise' or 'fall', in accordance with the formula contained in the Terms Sheet for a specified period following the Sale Date (the Capital proceeds).
A contract of sale has been entered into, with a XX% payment of the contracted amount being received on the contract date, with the remaining XX% to be paid up to XX months after the contract date in accordance with the Term Sheet.
Company A will sell the other Business assets, including fixed assets, for market value as determined by an independent valuer.
The Taxpayer will make a capital gain in relation to the disposal of the goodwill under the sale agreement.
Person A is more than 55 years of age and will retire after they have completed working part-time for the required period as outlined in the terms of sale.
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 701-1
Income Tax Assessment Act 1997 Section 701-5