Edited version of private advice

Authorisation Number: 1052304364272

Date of advice: 20 September 2024

Ruling

Subject: CGT - retirement exemption

Question 1

Will Person A satisfy the basic conditions in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) be eligible to access the small business capital gains tax (CGT) concessions in respect of the disposal of their interest in the property?

Answer 1

Yes.

Question 2

Will Person A be eligible to use the small business 50% active asset reduction in Subdivision 152-C of the ITAA 1997 in respect of the disposal of their interest in the property?

Answer 2

Yes.

Question 3

Will the Company be eligible to access the small business CGT concessions in respect of the disposal of its

post-CGT interest in the property?

Answer 3

Yes.

Question 4

Will the Company be eligible to use the small business 50% active asset reduction in Subdivision 152-C of the ITAA 1997 in respect of the disposal of its post-CGT interest in the property?

Answer 4

Yes.

Question 5

Will the Company be eligible to use the small business retirement exemption in Subdivision 152-D of the ITAA 1997 in respect of the disposal of its post-CGT interest in the property?

Answer 5

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Person A and the Company both own a post-CGT interest in the Property.

The Trust holds 100% of the shares in the Company and has done so since incorporation.

Since acquisition, Person A has operated a business (the Business) on the Property.

Person A pays rent to the Company for use of its interest in the Property.

The Business' aggregated turnover is less than $2m.

The trustee of the Trust has made a determination making Person A presently entitled to 100% of the Trust's income and capital for the relevant income year.

Person A and the Company have entered into a contract for sale for a portion of the Property.

Person A and the Company have never used the small business capital gains tax concessions in the past.

The Company will keep a written record of the amount it chooses to disregard (the exempt amount) under the retirement exemption.

The Company will make a payment to Paul Mason equal to the CGT exempt amount or the amount of capital proceeds, whichever is less.

The payment will be made by the later of 7 days after the Company makes the choice to disregard the capital gain, and 7 days after the Company receives the capital proceeds from the CGT event.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-205

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

Income Tax Assessment Act 1997 section 152-320

Income Tax Assessment Act 1997 section 152-325

Reasons for decision

Questions 1, 2, 3 and 4

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. You are eligible for the small business 50% active asset reduction provided the basic conditions are satisfied.

The basic conditions for small business CGT relief, as set out in section 152-10 of the ITAA 1997, 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 gain

(c)           at least one of the following applies:

(i)            you are a small business entity for the income year;

(ii)           you satisfy the maximum net asset value test;

(iii)         you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership; or

(iv)         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.

(d)          the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

In this case, Person A and the Company satisfy the basic conditions contained in section 152-10 of the ITAA 1997 because:

•                     a CGT event occurred when they disposed of their respective interest in the property

•                     the event resulted in a gain

•                     they were a small business entity at the time of the event

•                     they owned their interests in the property for more than 15 years and the property was used in their business, or in a business carried on by an affiliate or a connected entity, for a total of at least 7½ years of their ownership period

As they meet the basic conditions to apply the small business CGT concessions, they are also entitled to apply the 50% active asset reduction.

Question 5

Retirement exemption

Subsection 152-305(2) of the ITAA 1997 provides that a company or trust can use the retirement exemption to disregard a capital gain if:

(a)          the basic conditions are satisfied

(b)          the significant individual test is satisfied 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.

In this case, the Company satisfies the basic conditions. The significant individual test is also satisfied as Person A was a significant individual in in the Company just before the CGT event. In addition, the Company will:

•                     keep a written record of the amount it chooses to disregard (the CGT exempt amount) under Subdivision 152-D of the ITAA 1997

•                     make a payment to a CGT concession stakeholder equal to the CGT exempt amount or the amount of capital proceeds, whichever is less, and

•                     make the payment by the later of seven days after making the choice to disregard the capital gain or seven days after it receives the capital proceeds from the CGT event.

As such, the Company is eligible to choose to disregard all or part of the net capital gain it makes on the disposal of its post-CGT interest in the property under the small business retirement exemption up to the CGT retirement exemption limit.