Edited version of private advice

Authorisation Number: 1052292992988

Date of advice: 21 August 2024

Ruling

Subject: CGT - small business retirement exemption

Question 1

Does paragraph 152-325(4)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) prescribe the timing of the superannuation contributions required to be made by the Company in respect of Individual B if an eligible choice is made to apply the Small Business Retirement Exemption under Subdivision 152-D of Part 3-3 of the ITAA 1997.

Answer

Yes.

This ruling applies for the following periods:

Income tax year ending 30 June 20YY

Income tax year ending 30 June 20YY

Income tax year ending 30 June 20YY

Income tax year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The Company is a privately owned company.

The Company was registered on 23 June 20XX and provides consultancy services.

The Company has 2 stakeholders:

•            Individual A - 50% ownership and over 55

•            Individual B - 50% ownership and under 55.

Both Individual A and B are employees of the Company.

On 31 January 20XX, the Company entered into a sale agreement for the sale of goodwill in the Company to a third party, Company Y.

The Company and Company Y are not associates of each other.

The contract is an instalment arrangement. Each time an instalment is paid to the Company, the Company tax return Capital Gain schedule is amended to include the increased sale proceeds.

All of the basic conditions of sections 152-5 and 152-10 of the ITAA 1997 are satisfied.

The Company does not qualify for the small business 15-year exemption under Subdivision 152-B of Part 3-3 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 sections 152-5

Income Tax Assessment Act 1997 sections 152-10

Income Tax Assessment Act 1997sections 152-50

Income Tax Assessment Act 1997 Subdivision 152-A of Part 3-3

Income Tax Assessment Act 1997 Subdivision 152-B of Part 3-3

Income Tax Assessment Act 1997 Subdivision 152-D of Part 3-3

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

Income Tax Assessment Act 1997section 152-315

Income Tax Assessment Act 1997 section 152-325

Income Tax Assessment Act 1997 Subsection 152-325(2)

Income Tax Assessment Act 1997 Paragraph 152-325(4)(b)

Income Tax Assessment Act 1997 Subsection 152-325(7)

Income Tax Assessment Act 1997 section 152-330

Reasons for decision

The requirements for the Small Business Retirement Exemption are contained in Subdivision 152-D of the ITAA 1997. Under subsection 152-305(2) of the ITAA 1997 a company can choose to disregard a capital gain from a CGT event where all of the following conditions are met:

a)            the basic conditions in Subdivision 152-A of the ITAA 1997are satisfied for the capital gain; and

b)            the entity satisfies the significant individual test under section 152-50 of the ITAA 1997; and

c)            the company or trust conditions in section 152-325 of the ITAA 1997 are satisfied.

You have advised both paragraphs (a) and (b) are satisfied.

Under section 152-330 of the ITAA 1997, the Small Business Retirement Exemption is not available if the Company is eligible for the 15 year exemption under Subdivision 152-B of Part 3-3 of the ITAA 1997.

You have advised that the Company is not eligible for the 15 year exemption.

You have also advised that an eligible choice will be made under section 152-315 of the ITAA 1997 to apply the Small Business Retirement Exemption.

Company or trust conditions

Various conditions are prescribed in section 152-325 of the ITAA 1997 in relation to how a company or trust must act with respect to a CGT event for which an eligible choice has been made to apply the Small Business Retirement Exemption.

Under subsection 152-325(2) of the ITAA 1997, if the company or trust receives the capital proceeds from the CGT event in instalments, those conditions are required to be satisfied each time an instalment is paid.

Under subsection 152-325(7) of the ITAA 1997, if the CGT concession stakeholder is under 55 years of age, the company or trust must make payment of the CGT concession stakeholder's percentage to a complying superannuation fund for the CGT concession stakeholder.

The timing rules for that payment are contained in paragraph 152-325(4)(b) of the ITAA 1997 which relevantly provides that the payment must be made by the later of:

(i)           7 days after the company or trust makes the choice to apply the CGT Small Business Retirement Exemption; and

(ii)           7 days after the company or trust receives an amount of capital proceeds from the CGT event.

Application to your circumstances

Paragraph 152-325(4)(b) of the ITAA 1997 applies here. As Individual B is under 55 years of age, the Company must make payment of their percentage with respect to each instalment to a complying superannuation fund for Individual B by the later of:

(i)           7 days after the Company makes the choice to apply the GCT Small Business Retirement Exemption; and

(ii)           7 days after the Company receives the particular instalment of the capital proceeds from the CGT event.