Edited version of private advice

Authorisation Number: 1052226262402

Date of advice: 26 February 2024

Ruling

Subject: CGT - small business concessions - 15-year exemption

Question 1

Does the small business 15-year exemption under Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the sale of the properties?

Answer

Yes

Question 2

Will the company's proposed payments to individual A and individual B be treated as non-assessable non-exempt income under section 152-125 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2023

Year ending 30 June 2024

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

Individual A and individual B have been the sole shareholders of a company since its incorporation in 19XX (the company), with individual A owning 99.04% of shares, and individual B owning 0.96% of shares.

Individual A and individual B are spouses.

In 19XX, the company acquired a collection of commercial properties (the properties).

From 19XX to 20XX, the company used the properties in the course of carrying on a business.

In 20XX, the company sold their business to a third party and leased the properties under a long-term leasing arrangement.

In 20XX, the company sold the properties, resulting in a capital gain.

The company intends to make the payments of the sale proceeds to its shareholders within two years from the CGT event for the sale of the properties.

The shareholders intend to wind up the company and cease all operations after the payments are made.

The net value of all the company's CGT assets is less than $6 million.

Individual A and individual B and both over the age of 55.

Individual A and individual B intend to apply the proposed company payments towards their retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-50

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-60

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

Income Tax Assessment Act 1997 section 152-125

Reasons for decision

Question 1

Small business concessions - 15-year exemption

Subsection 152-110(1) of the ITAA 1997 provides that 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 of the ITAA 1997 are satisfied;

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

(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)          the individual who was the significant individual of the company or trust just before the CGT event was 55 or over at the time of the CGT event and the event happens in connection with your retirement

Section 152-50 of the ITAA 1997 provides that an entity satisfies the significant individual test if the entity had a least one significant individual just before the CGT event. Under section 152-55 of the ITAA 1997, an individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. The 20% can be made up of direct or indirect percentages.

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

The words 'in connection with' can also apply where the CGT event occurs sometime before retirement. This type of case would depend on its own particular facts, and would need to be considered on a case-by-case basis

Furthermore, Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business?states that where a company is established and maintained to make a profit for its shareholders, and invests its assets in gainful activities that have both a purpose and prospect of profit, it will be taken to be carrying on a business within the meaning of section 328-110 of the ITAA 1997.

Application to your circumstances

In this case, the company is taken to have satisfied the basic conditions in Subdivision 152-A of the ITAA 1997, and the properties have been owned for more than 15 years. As individual A owns 99.04% of the company's shares and has been a shareholder of the company since its incorporation, they have been a significant individual of the company for at least 15 years. Individual A was also a significant individual of the company before the relevant CGT event, was over 55 years at the time of the event.

While the business was sold before the properties, the company continued to derive rental income. Thus, per TR 2019/1, the company was still carrying on a business as it was investing its assets in gainful activities for the purpose of making a profit for its shareholders. As the shareholders, including individual A, intend to cease the company's activities and wind it up soon after the properties have been sold, the sale of the properties can be taken to be in connection with individual A's retirement.

Therefore, the company will be able to apply the small business 15-year exemption under Subdivision 152-B of the ITAA 1997 to disregard any capital gain made from the sale of the properties.

Question 2

Distributions of the exempt amount

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, 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.

A 'CGT concession stakeholder' of a company is defined in section 152-60 of the ITAA 1997 as an individual who is either:

(a)          a significant individual in the company; or

(b)          a spouse of a significant in the company, if the spouse has a small business participation percentage in the company at the that time that is greater than zero.

Application to your circumstances

In this case, a capital gain made by a company from the sale of the properties will be disregarded under the small business 15-year exemption as explained under question 1. The company intends to make a payment to the company shareholders individual A and individual B within 2 years after the relevant CGT event.

As individual A owns 99.04% of the company's shares, he will be taken to be significant individual of the company. Furthermore, as individual B is individual A's spouse and owns 0.96% of shares of shares, they will also be considered a CGT concession stakeholder.

Therefore, the company's payments to its shareholders will be treated as non-assessable non-exempt income under section 152-125 of the ITAA 1997 as long as the payments are made within 2 years after the CGT event, and payments do not exceed the amount determined by multiplying the CGT concession stakeholders control percentage by the exempt amount.