Edited version of private advice

Authorisation Number: 1052225110607

Date of advice: 13 March 2024

Ruling

Subject: Small business 15 year exemption

Question

Is A Pty Ltd (A) entitled to disregard any capital gain from the proposed sale of its businessto B Pty Ltd as trustee for C Trust (C Trust) under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is T entitled to disregard any exempt capital gain paid to them by A Pty Ltd (sourced from the sale of its business to C Trust) under section 152-125 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

1 July XXXX to 30 June XXXX

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

1.    T is the sole owner of all shares in A and has been so for more than 15 years. A operates a business.

2.    A has an annual turnover greater than $2 million for the relevant income year.

3.    A is proposing to sell its business to B Pty Ltd as trustee for C Trust for $X. C Trust is owned and controlled by T's children. The business has been independently valued and the sale price negotiated at arm's length.

4.    C Trust will owe A $X for the purchase of its business.

5.    A will later assign the loan receivable owed to it by the C Trust to T within 2 years from the date of sale of its business.

6.    MNO Pty Ltd (MNO) is a company 100% beneficially owned by D Pty Ltd as trustee for the K Family Trust. MNO leases and arranges/assigns leases relating to A's business.

7.    The following entities are either connected entities of both A and T or are connected to affiliate entities of A for the purposes of section 152-15 of the ITAA 1997:

(a)          K Family Trust

(b)          P (T's spouse)

(c)           MNO

(d)          D Pty Ltd.

8.    As part of the sale of A's business, the shares in both A and MNO will be transferred at a nominal value of $X to trusts controlled by T's children.

9.    A will continue to operate the business until the proposed sale of its business.

10. Both A and T state that the total net value of CGT assets owned by them, their connected entities, their affiliates or entities connected to their affiliates in accordance with section 152-15 of the ITAA 1997 is under $6 million.

11. T will be retiring after the sale of A's business to C Trust.

12. T is over 55 years of age.

Assumption

13. MNO is deemed to be an affiliate entity of A for the purposes of section 328-130 of the Income Tax Assessment Act 1936 (ITAA 1936).

Relevant legislative provisions

Income Tax Assessment Act 1936 section 328-130

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

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 subsection 152-110(1)

Income Tax Assessment Act 1997 paragraph 152-110(1)(a)

Income Tax Assessment Act 1997 paragraph 152-110(1)(b)

Income Tax Assessment Act 1997 paragraph 152-110(1)(c)

Income Tax Assessment Act 1997 paragraph 152-110(1)(d)

Income Tax Assessment Act 1997 section 152-125

Reasons for decision

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

Question 1

Is A entitled to disregard any capital gain from the proposed sale of its business to B Pty Ltdas trustee for the C Trust under section 152-110?

Summary

A is entitled to disregard any capital gain from the proposed sale of its business under section 152-110.

Detailed reasoning

1.    Subsection 152-110(1) states:

An entity that is a company or trust can disregard any 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 entity continuously owned the *CGT asset for the 15-year period ending just before the CGT event;

Note: Section 152-115 allows for continuation of the period if there is an involuntary disposal of the asset.

(c) the entity 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;

(d) an individual who was a significant individual of the company or trust 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

2.    A will satisfy the basic conditions in subsection 152-10(1) as:

(a)          CGT event A1 will happen when A sells its business to C Trust

(b)          the event will result in a capital gain being made

(c)          the total net value of CGT assets owned by A, its connected entities, affiliates or entities connected to its affiliates is stated to be under $6 million, A will satisfy the maximum net value asset test

(d)          the relevant CGT asset being sold is the goodwill of the business, which is considered an active asset, because it is an intangible asset inherently connected with the business. As A has owned the business for more than 15 years, the goodwill satisfies the active asset test.

3.    As all the basic conditions in subsection 152-110(1) have been satisfied, the first condition in paragraph 152-110(1)(a) will be satisfied.

4.    With A owning the business / goodwill for more than 20 years, it will satisfy the second condition in paragraph 152-110(1)(b).

5.    To satisfy the third condition in paragraph 152-110(1)(c) requires A to have a significant individual for a total of at least 15 years.

6.    Section 152-55 states:

An individual is a significant individual in a company or 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%.

7.    As T owns all the shares in A for more than 15 years, T will be a significant individual of A and therefore satisfy the third condition in paragraph 152-110(1)(c).

8.    The relevant fourth and final condition in paragraph 152-110(1)(d) requires the individual to be either 55 or over at the time the CGT event and the event happened in connection with the individual's retirement. T will be over the age of 55 years of age when A will sell its business. As T has stated that they will be retiring after this sale, the final condition in paragraph 152-110(1)(d) will be satisfied.

9.    Therefore, A will satisfy all the conditions in subsection 152-110(1) and can disregard the capital gain it will make on the disposal of the goodwill relating to the sale of its business.

Question 2

Is T entitled to disregard any exempt capital gain paid to them by A Pty Ltd (sourced from the sale of its business to C Trust) under section 152-125?

Summary

T is entitled to disregard any exempt capital gain paid to them by A (sourced from the sale of the goodwill of its business) under section 152-125.

Detailed reasoning

10. Section 152-125 provides that, if a capital gain made by a company is disregarded under section 152-110 (small business 15-year exemption), 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:

(a) the company makes a payment within 2 years after the CGT event that resulted in the capital gain or, in appropriate circumstances, such further time is allowed by the Commissioner

(b) the payment is made to an individual who was a CGT concession stakeholder of the company just before the CGT event, and

(c) 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.

11. A is entitled to disregard any capital gain it makes from the sale of the goodwill of its business under section 152-110. A has stated it will transfer the loan receivable owed to it from C Trust to T within 2 years from the date of sale of A's business. As T is a significant individual of A, T will be a CGT concession stakeholder of A.

12. Accordingly, T will be entitled to disregard any capital gain received from A in accordance with section 152-125.