Edited version of private advice

Authorisation Number: 1051790664222

Date of advice: 15 December 2020

Ruling

Subject: CGT - small business concessions 15-year exemption

Question

Is Company A eligible to access the small business 15-year exemption under Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Individual A and Individual B are directors of Company A and have each beneficially owned 50% of the total ordinary shares issued in Company A since it was incorporated.

Company A:

•                     has continuously owned the Property for more than 15 years; and

•                     has operated a business at the Property for more than 15 years.

A contract for the sale of the Property was entered into during the relevant income year.

Company A has continued to operate the business after the sale of the Property.

Company A made a capital gain from the sale of the Property.

Individual A and B were both over 55 years old when the Property was sold and are both planning to retire.

Individual B only works part of the week. Individual B plans to retire soon and their working hours are now sometimes reduced to only a few hours a week.

Individual A is also planning to retire. However, under the terms of the sale, the new owner of the Property requires Individual A to stay in the business for up to X years. For a particular period Individual A needs to be actively involved in the business with diminishing working hours. Then the working hours will be significantly reduced by the end of 20XX.

Company A's aggregated turnover for the 20XX and 20XX income years was not less than $2 million.

The sum of the net value of the CGT assets of Company A, entities connected with Company A, affiliates of Company A and entities connected with affiliates of Company A was calculated to be less than $6 million at the time of entry into the contract for sale of the Property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subsection 152-10(1AA)

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 subsection 152-70(1)

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-110

Reasons for decision

All legislative references are to the ITAA 1997unless otherwise specified.

Section 152-110 provides the small business 15-year exemption for companies.

Under section 152-110, a company can disregard a capital gain arising from a CGT event if all of the following conditions are satisfied:

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

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

(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 the company owned the CGT asset; and

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

(i)            was 55 or over at that time and the event happened in connection with the individual's retirement; or

(ii)           was permanently incapacitated at that time.

Condition (a) - The basic conditions in Subdivision 152-A

The relevant basic conditions in section 152-10 that must be satisfied in relation to Company A's sale of the Property are:

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

(b)          the event would have resulted in a capital gain;

(c)           you are a CGT small business entity under subsection 152-10(1AA) for the income year or you satisfy the maximum net asset value test in section 152-15; and

(d)          the CGT asset satisfies the active asset test in section 152-35.

Company A satisfies the basic conditions in Subdivision 152-A as the sale of the Property in the income year gave rise to CGT event A1 that would have resulted in a capital gain.

Company A is not a CGT small business entity for the income year because its aggregated turnover was not less than $2 million in either of the 20XX or 20XX income years. However, it satisfies the maximum net asset value test under section 152-15 because the sum of the net value of the CGT assets of Company A, its connected entities, affiliates and entities connected with its affiliates, just before the CGT event, did not exceed $6 million.

The Property that was sold satisfies the active asset test under section 152-35 since Company A has owned the asset for more than 15 years during which time it has been used to carry on the business conducted by Company A.

Therefore, condition (a) is satisfied.

Condition (b) - the company continuously owned the CGT asset for the 15-year period ending just before the CGT event

Company A purchased the Property in 19XX and has continuously owned the Property up until it was sold.

Therefore, condition (b) is satisfied.

Condition (c) - the company had a significant individual for a total of at least 15 years during which the company owned the CGT asset

The term 'significant individual' is defined in section 152-55. An individual is a significant individual in a company or a trust at a time if, at that time, the individual has a 'small business participation percentage' in the company or trust of at least 20%.

Under section 152-65, an entity's small business participation percentage in another entity is the sum of the first entity's direct and indirect small business participation percentages in the other entity. Individuals A and B have each owned 50% of the total ordinary shares issued in Company A since it was incorporated and therefore each hold a 50% direct small business participation percentage in Company A pursuant to item 1 of the table in subsection 152-70(1). Individuals A and B therefore each hold a small business participation percentage in Company A of 50% and were both significant individuals in Company A for a total of at least 15 years during which Company A owned the Property.

Therefore, condition (c) is satisfied.

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

(i)            was 55 or over at that time and the event happened in connection with the individual's retirement; or

(ii)           was permanently incapacitated at that time

Both Individuals A and B were significant individuals of Company A just before the CGT event. Both individuals were over 55 years old when Company A entered into the contract for sale of the Property. Therefore, provided the sale of the Property happens in connection with the retirement of either individuals or both, Company A will satisfy condition (d).

According to the Advanced guide to capital gains tax concessions for small business 2013-2014:

•                     a CGT event may be 'in connection with your retirement' even if it occurs some time before retirement;

•                     whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case;

•                     there would need to be a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement; and

•                     it is not necessary for there to be a permanent and everlasting retirement from the workforce.

Under the terms of the sale, the new owner of the Property requires Individual A to stay in the business for up to XX years. Within the initial period Individual A needs to be actively involved in the business with diminishing working hours. Then the working hours will be significantly reduced by the end of 20XX. The sale of the Property is therefore in connection with Individual A's retirement even though it occurs some time before their retirement.

The sale of the Property also happens in connection with Individual B's retirement. Individual B only works part of the week. Individual B plans to retire soon and their working hours are now sometimes reduced to only a few hours a week.

Therefore, condition (d) is satisfied.

Conclusion

Company A satisfies all the conditions under section 152-110 and qualifies for the small business 15-year exemption for companies.