Private ruling: Capital Gains Tax - Small Business Concessions
Published: January 2012
Ruling period: 1 July 2011 to 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Can a company claim the Capital Gains Tax (CGT) small business 50% reduction in section 152-205? | A1: Yes. | Q2: Can a company claim the retirement exemption in section 152-305? | A2: Yes.

Relevant facts and circumstances: A company is selling part of its business structure. The business was not purchased as a going concern but developed over time. Consequently, the cost base of the asset is nil. The ruling application states that the company is eligible for the small business concessions as it is carrying on a business, has aggregated turnover of less than $2 million and net assets less than $6 million. It also states that the business being sold is an active asset of the company. There is a major shareholder in the company who the ruling application specifies is a significant individual of the company. He is more than fifty five years of age at the relevant time.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-205 | Income Tax Assessment Act 1997 Section 152-305

Reasons for decision: Summary: Unless otherwise stated, all legislative references in the following Reasons for Decision are to the Income Tax Assessment Act 1997 . The basic conditions for small business relief in section 152-10 are satisfied. Consequently, the small business 50% reduction in section 152-205 can be applied. The small business retirement exemption in section 152-305 is available in respect of the remaining half of the gain as the entity satisfies the significant individual test. In order to obtain the exemption, the company must make a payment to a CGT concession stakeholder within the relevant timeframe specified in section 152-325. | Detailed Reasoning - Detailed reasoning: There are several concessions which may reduce or eliminate liability to pay tax on capital gains associated with the disposal of CGT assets. Those concessions are available, where certain qualifications are met, in respect of assets which are classified as active assets of a business. In order for you to choose to disregard all or part of a capital gain under the small business concessions, all of the concessions require that at least the basic conditions are satisfied. With the exception of the small business 50% reduction, additional requirements attach to specific concessions. The basic conditions are set out in section 152-10. They are: (1) a CGT event happens in relation to an asset that the taxpayer owns: paragraph 152-10(1)(a) (2) the event would otherwise have resulted in a capital gain: 152-10(1)(b) (3) at least one of the following applies(152-10(1)(c): § · the taxpayer satisfies the maximum net asset value test § · the taxpayer is a "small business entity" for the income year and (4) the asset satisfies the active asset test: 152-10(1)(d). In the present case, paragraphs 152-10(1)(a) and 152-10(1)(b) are satisfied. A taxpayer will satisfy paragraph 152-10(1)(c) if they are a small business entity for the whole income year or they satisfy the requirements of the maximum net asset value test in section 152-15. From the information supplied, the company would satisfy the maximum net asset value test and also the definition of a small business entity for the period in question and therefore meet the requirements of paragraph 152-10(1)(c). Paragraph 152-10(1)(d) requires that the relevant asset must satisfy the active asset test in section 152-35. Section 152-35 provides that a CGT asset satisfies the active asset test if the asset was an active asset of the taxpayer: § for a total of at least half the period from when the asset is acquired until the CGT event, or § if the asset is owned for more than 15 years, for a total of at least 7½ years during that period. Section 152-40 of the ITAA 1997 provides the meaning of an active asset. Sub-section 152-40(1) of the ITAA 1997 states: A CGT asset is an active asset at a time if, at that time: (a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a *business that is carried on (whether alone or in partnership) by: (i) you; or (ii) your *affiliate; or (iii) another entity that is *connected with you; or (b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you. You have advised that the asset in question is an active asset. If it was so used for at least half of the period that it was held by the company the active asset test in section 152-35 would be passed and the requirements of paragraph 152-10(1)(d) satisfied. Consequently, if you have met the requirements of each of the paragraphs of sub-section 152-10(1) then you would meet the basic conditions to utilize the small business concessions. One of the concessions is the small business 50% reduction. Section 152-205 states that a capital gain may be reduced by 50 per cent provided that the basic conditions detailed above are met. A further concession is the retirement exemption in section 152-305. It is available if the basic conditions are satisfied and, in respect of companies, the entity satisfies the significant individual test in section 152-50 and the company conditions in section 152-325. The significant individual test is satisfied if the company has an individual who has a small business participation percentage of at least twenty per cent. A small business participation percentage is defined in section 152-65 and 152-70 and can be met by the individual holding the relevant percentage of the voting power in the company, the dividends paid by the company or capital distributions which the company may make. There is an individual who has fifty per cent shareholding in the company and is a significant individual. Section 152-325 requires that the company must make a payment in respect of the event to at least one CGT concession stakeholder which, as defined in section 152-60, includes a significant individual. It must make the payment in the time frame set out in subsection 152-325(5). | Detailed Reasoning - Application to the circumstances of the company and individual: On the basis of the information supplied, the company satisfies the basic conditions in section 152-10 which must be met to obtain access to the small business concessions. Consequently, it will qualify for the small business 50% reduction in section 152-205. In respect of the remaining half of the gain, the information supplied states that the company has a significant individual who will be over fifty five years of age at the relevant time. As a result, the retirement exemption will be available as long as the company makes a payment to a CGT concession stakeholder within the time limit set in subsection 152-325(5). Consequently, the capital gain of the company will be effectively reduced to nil (providing the $500,000 lifetime limit in respect of the retirement exemption is not exceeded). Please note that the capital gain in question is a gain of the company which would have been assessable to it in the absence of the concessions. From the perspective of the significant individual there is no capital gain distributed to him for which he would need to account.

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