Private ruling: Capital gains tax concessions for small business
Published: March 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Do you satisfy the basic conditions necessary to be able to access the capital gains tax concessions (CGT) for small business? | A1: Yes | Q2: Are you eligible to disregard any capital gain made on disposal of the shares under the CGT 15-year exemption concession for small business? | A2: Yes

Relevant facts and circumstances: You established a business in the 1980's under a company structure. You are the only shareholders of the company, and you each hold one ordinary share (and have done so since the company's inception). You intend to dispose of your shares in the company. Consideration will be received for the disposal. You state that you are both aged over 55 and the disposal of the shares will happen in connection with your retirement. You state that the market value of the active assets, financial instruments and cash of the company are more than 80% of the market value of all the assets of the company and were more than 80% of the market value of all the assets of the company for over half the period of your share ownership. You state that the business was carried on from the company's inception until approximately 20 years later when the business was sold. You state that you satisfy the basic conditions necessary to be able to access the capital gains tax concessions for small business and that during the operational period of the business, it was a small business entity. You state that you each satisfy the maximum net asset value test.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 152-40 | 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 152-70 | Income Tax Assessment Act 1997 Section 152-105

Reasons for decision: Detailed Reasoning - Small business CGT concession eligibility: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in the 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 (MNAV) test in section 152-15 of the ITAA 1997 (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) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (a) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Section 104-10 of the ITAA 1997 provides that CGT event A1 happens when your ownership in a CGT asset (eg. shares) is transferred to another entity. Subsection 152-10(2) of the ITAA 1997 provides that if the CGT asset is a share in a company or an interest in a trust (the object company or trust), one of these additional basic conditions must be satisfied just before the CGT event: (a) you are a CGT concession stakeholder in the object company or trust; or (b) CGT concession stakeholders in the object company or trust together have a small business participation percentage in you of at least 90%. You will be disposing of your shares in the company, accordingly, CGT event A1 will happen. The disposal will result in a capital gain and, you have stated that you satisfy the MNAV test, therefore you will meet conditions (a), (b) and (c) of the basic conditions. As such, we now only need to establish whether you satisfy the active asset test (condition (d)), and one of the additional conditions relating to shares in a company, as listed in subsection 152-10(2) of the ITAA 1997. | Detailed Reasoning - Active asset test: Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if: • you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period of ownership, or • you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 and a half years. Subsection 152-40(3) of the ITAA 1997 provides that a share in a company that is an Australian resident can also be an active asset. This is provided that the total of: • the market values of the active assets of the company; and • the market value of any financial instruments of the company that are inherently connected with a business that the company carries on; and • any cash of the company that is inherently connected with such a business; is 80% or more of the market value of all of the assets of the company. As the active asset test requires a CGT asset to have been an active asset for at least half of a particular period, as outlined earlier, in order for a share in an Australian resident company to meet this requirement, the company must satisfy the 80% test for that same period. The 80% test will be taken to have been met: • where breaches of the threshold are only temporary in nature (subsection 152-40(3B) of the ITAA 1997), and • in circumstances where it is reasonable to conclude that the 80% threshold has been passed (subsection 152-40(3A) of the ITAA 1997), such as when there have been no significant changes to the assets or liabilities of the company. In your case, you acquired the shares in the company in the 1980's and will dispose of them in the 2013-14 financial year, meaning the shares have been owned for well over 15 years. You have confirmed that the 80% test has been satisfied by the company for over half the period of your share ownership. Accordingly, the shares will satisfy the active asset test. | Detailed Reasoning - CGT concession stakeholder: Section 152-60 of the ITAA 1997 provides that an individual is a CGT concession stakeholder of a company or trust at a time if the individual is a significant individual in the company or trust, or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero. Section 152-55 of the ITAA 1997 explains that an individual is a significant individual in a company or trust if the individual has a small business participation percentage in the company or trust of at least 20%. Section 152-65 of the ITAA 1997 provides that an entity's small business participation percentage in another entity at a time is the percentage that is the sum of: a) the entity's direct small business participation percentage in the other entity at that time; and b) the entity's indirect small business participation percentage in the other entity at that time. Subsection 152-70(1) of the ITAA 1997 explains that an entity's direct small business participation percentage in a company is the percentage of: • voting power that the entity is entitled to exercise (except for jointly owned shares) or • any dividend payment that the entity is entitled to receive, or • any capital distribution that the entity is entitled to receive, or • if they are different, the smallest of the three percentages above. In your case, the CGT asset in question is the shares in the company. The company share structure consists of two ordinary shares, of which you each hold one share. Therefore, you each hold a 50% direct small business participation percentage in the company and, accordingly, you will both be significant individuals and consequently CGT concessions stakeholders in the company. | Detailed Reasoning - Small business 15-year exemption: The small business 15-year exemption takes priority over the other small business concessions and the CGT discount. If the small business 15-year exemption applies, you entirely disregard the capital gain so there is no need to apply any further concessions. Further, you do not reduce the capital gain by any capital losses before you apply the 15-year exemption concession. Subsection 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if all of the following conditions are satisfied: (a) you satisfy the basic conditions (b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event (c) you are either: i. 55 or over at the time of the CGT event and the event happens in connection with your retirement; or ii. permanently incapacitated at the time of the CGT event. In your case: • you satisfy the basic conditions • you have owned the asset for over 15 years, and • you are aged over 55 • you state that the disposal of the shares will happen in connection with your retirement Accordingly, you satisfy all the conditions necessary to be eligible for the small business 15-year exemption concession.