Edited version of private advice

Authorisation Number: 1051895895290

Date of advice: 4 September 2021

Ruling

Subject: CGT small business concessions

Question 1

Does the property satisfy the active asset test for the purpose of the capital gains tax (CGT) small business concessions under section 152-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Do you satisfy the conditions to apply the CGT small business 15 year exemption under Subdivision 152B of the ITAA 1997?

Answer

No

Question 3

Are you eligible to apply the CGT small business retirement exemption under Subdivision 152D of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

A Pty Ltd (the Company) was incorporated in 19XX.

B and C are the directors/shareholders of the Company, each holding a 50% interest.

A property (the property) was acquired by the Company in 19XX.

The property was used by B & C in their business from acquisition to 20XX, a period of more than 15 years.

B & C sold their business in 20XX.

B & C retired after the sale of the business.

The property was then leased to the purchasers of the business from 20XX.

Both B & C are over 55 years of age.

It is the Company's intention to dispose of the property.

It is expected that there will be a capital gain made upon disposal of the property.

The Company has an aggregated turnover of less than $XXX.

The Company and its connected entities have a net asset value of less than $XXXX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subsection 152-35(1)

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 subsection 328-125(1)

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 paragraph 328-125(2)(a)

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 subsection 152-305(2)

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-320

Income Tax Assessment Act 1997 subsection 152-305(2)

Reasons for decision

Summary

The property satisfies the active asset test in relation the CGT small business concessions and upon disposal of the property, the Company will satisfy the basic conditions to apply the CGT small business concessions.

The company does not meet the conditions to apply the CGT small business 15 year exemption as the disposal of the property is not considered to be in connection with the retirement of the significant individuals, B & C.

The company meets the conditions to apply the CGT small business retirement concessions as long as the requirements under subsection 152-305(2) of the ITAA 1997 relating to keeping written records of the amount disregarded and timing of the payment are met.

Detailed reasoning

Basic conditions

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. Subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies the small business 50% active asset reduction provided the basic conditions are satisfied.

A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions contained in section 152-10 of the ITAA 1997 are satisfied:

(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 gain,

(c)   The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

(d)  At least one of the following applies;

-       you are a small business entity for the income year,

-       you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997,

-       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, or

-       you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

To be eligible to apply the CGT small business concessions you must satisfy all four of the basic conditions above.

Active asset test

Subsection 152-35(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a CGT asset satisfies the active asset test if:

•         you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period of ownership, or

•         you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 and a half years.

Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.

Under subsection 328-125(1) of the ITAA 1997, an entity is 'connected with' another entity if either entity controls the other entity in the way described in section 328-125 of the ITAA 1997 or both entities are controlled in that way by the same third entity.

Under paragraph 328-125(2)(a) of the ITAA 1997, an entity controls another entity, that is not a discretionary trust, if it or its affiliates, or all of them together beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that carry between them the right to receive at least 40% of any distribution of income or capital by the other entity.

In your case, the Company has held the property for more than 15 years. B & C would be considered connected entities of the Company as each hold a 50% interest in the Company. The property had been used by B & C in their business for more than 7 and a half years, therefore the property satisfies the active asset test.

There is no requirement that the asset be actively used at the time of disposal. Once an asset satisfies the active asset test, it will remain to be considered an active asset irrespective of its use at the time of disposal.

When the property is sold, CGT event A1 will happen and there is an expectation that there will be a capital gain. The asset satisfies the active asset test and the Company satisfies the maximum net asset value test. As such, the Company will satisfy the basic conditions for the CGT small business concessions. Therefore, the company can apply the small business 50% active asset reduction to the capital gain from the sale of the property.

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 can disregard the capital gain from the disposal of a CGT asset if:

(a)    the company or trust satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions,

(b)    the company or trust continuously owned the CGT asset for the 15-year period ending just before the CGT event happened,

(c)     the company or trust 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 entity owned the CGT asset, and

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

­        at least 55 years old at that time and the event happened in connection with their retirement or

­        permanently incapacitated at that time.

In connection with 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 at least 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.

In this case, the Company satisfies the basic conditions for the CGT small business concessions and the Company has owned the property for more than 15 years. It is considered that both B & C would be significant individuals of the Company as they both have a participation percentage of more than 20% in the Company (each holding 50% of the Company shareholding). As B & C have held their interest for more than 15 years, the Company has had significant individuals for at least 15 years.

Both B & C are over 55 years old, however they retired in 20XX when their business was sold. At that point in time, the nature of their present activities and number of hours worked changed, not XX years later when the property is sold, therefore the disposal of the property is not considered to be in connection with B & C's retirement. As such the Company does not meet the requirements to apply the CGT small business concessions 15 year exemption.

Retirement exemption

Subdivision 152-D of the ITAA 1997 contains the small business retirement exemption. You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions.

If you are a company or trust, other than a public entity, you can choose to disregard all or part of a capital gain where you meet all the following conditions contained in subsection 152-305(2) of the ITAA 1997:

•         you satisfy the basic conditions

•         you satisfy the significant individual test

•         you keep a written record of the amount you choose to disregard (the exempt amount) and, if there are more than one CGT concession stakeholders, each stakeholder's percentage of the exempt amount (one may be nil, but together they must add up to 100%)

•         you make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount

•         the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and

•         where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession (up to the asset's CGT exempt amount).

If a CGT concession stakeholder is under 55 years old just before receiving a payment, an amount equal to that payment must be paid to a complying superannuation fund or retirement savings account (RSA) on their behalf within 7 days of making the choice. The company or trust must notify the trustee of the fund or the RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption.

There is no requirement to make this contribution if the stakeholder was 55 years old or older.

You must make payments:

• seven days after you choose to disregard the capital gain if you choose the retirement exemption for a J2, J5 or J6 event, or
• in any other case, by the later of

-        seven days after you choose to disregard the capital gain, and

-        seven days after you receive the capital proceeds from the CGT event.

Section 152-60 of the ITAA 1997 provides that an individual is a CGT concession stakeholder of a company or trust at a time if the individual is a significant individual in the company or trust.

The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment.

Under section 152-320 of the ITAA 1997, an individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption.

In this case, the Company meets the basic conditions and satisfies the significant individual test with both B & C being the Company's CGT concession stakeholders. The Company will be eligible to apply the small business retirement exemption as long the remaining requirements under subsection 152-305(2) of the ITAA 1997 relating to the keeping written records of the amount disregarded and timing of the payment are met.

Note that as the CGT concession stakeholders are over 55 years of age, the Company is not required to make a payment to a complying superannuation fund or retirement savings account on their behalf.

The company must make a payment directly to the CGT concession stakeholders by the later of seven days after the choice is made to disregard the capital gain or seven days after the capital proceeds are received. The company must keep a written record of the amount disregarded and as there are two CGT concession stakeholders, each stakeholder's percent of the exempt amount.