Edited version of private advice

Authorisation Number: 1052368243432

Date of advice: 28 February 2025

Ruling

Subject: CGT - small business 15-year exemption

Question 1

Are you entitled to apply the small business 15-year exemption in section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard the capital gain made on the disposal of the property?

Answer 1

No.

Question 2

Will the distribution of the proceeds of sale be exempt to the shareholders and not deductible to you under section 152-125 of the ITAA 1997?

Answer 2

Not applicable.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The company shares were originally owned by:

•                     Shareholder A - 40%

•                     Shareholder B - 40%

•                     Shareholder C - 20%

Shareholder B's shares were transferred to Shareholder A.

You purchased the property over 20 years ago and operated a business from those premises for a number of years. Shareholder A and Shareholder B retired when the business ceased approximately 20 years ago.

From the cessation of the business until the date of sale of the property, the property was leased to a company owned by Shareholder C which operates a business from the premises.

The premises has been sold.

Shareholder C is under 55 years of age not retiring.

The premises had been continuously used as business premises over the ownership period.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 section 152-125

Reasons for decision

The 15-year exemption allows an entity to disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met.

Section 152-110 of the ITAA 1997 provides that a company can disregard any gain arising from a CGT event if all of the following conditions are satisfied:

(a)           the basic conditions of Subdivision 152-A are satisfied;

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

(c)           the company had a significant individual for a total of at least 15 years during which the company owned the CGT asset;

(d)           the significant individual of the company just before the CGT event either:

(i)            was 55 or over at the time of the CGT event and the event happens in connection with the significant individual's retirement; or

(ii)           the significant individual is permanently incapacitated at the time of the CGT event.

Pursuant to section 152-55 of the ITAA 1997, an individual is a significant individual in a company at a time if, at that time, the individual has a small business participation percentage in the company of at least 20%.

In connection with retirement

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. We consider that 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. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

A CGT event may happen in connection with your retirement irrespective of whether it happens before or after your retirement; however, your retirement must have some proximity to the CGT event. The closer the CGT event is to the retirement, the more likely the CGT event is 'in connection with your retirement'.

In this case, Shareholder A, a significant individual of the company, retired approximately 20 years prior to the sale of the property. While it is acknowledged a retirement can happen sometime before or after the CGT event, there still needs to be a connection between the retirement and the disposal of the Property. It is the Commissioner's view that, due to the significant period between Shareholder A's retirement and the disposal of the property, the requisite connection between the 2 events does not exist. The only other significant individual, Shareholder C is under 55 years of age not retiring.

Therefore, as the sale of the property has not happened in connection with the retirement of a significant individual who was 55 or over, and no evidence has been provided that a significant individual was permanently incapacitated at the time of the CGT event, you cannot disregard the capital gain made on the disposal of the property under section 152-110 of the ITAA 1997.

Distributions of the exempt amount

In accordance with section 152-125 of the ITAA 1997, 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 (if certain additional conditions are satisfied):

•                     not included in the assessable income of the CGT concession stakeholder

•                     not deductible to the company or trust, and

•                     not considered a dividend or frankable distribution

A 'CGT concession stakeholder' of a company is 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.

In this case, as you do not meet the requirements of the 15-year exemption, section 152-125 of the ITAA 1997 is not applicable.