Private ruling: CGT - small business retirement exemption
Date of advice: 24 July 2015
Published: July 2015
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the company satisfy the requirements to choose the small business retirement exemption in relation to the capital gain made on the sale of goodwill provided that the choice is made in writing and that a payment is made to the capital gains tax (CGT) concession stakeholder in accordance with section 152-325 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will the Commissioner allow further time as provided in paragraph 103-25(1)(b) of the ITAA 1997 for the company to choose to apply the small business retirement exemption to the capital gain that arose in the relevant financial year? | A2: Yes

Relevant facts and circumstances: The company sold its business in 20XX and made a capital gain in relation to the goodwill. A previous tax agent lodged the company's relevant tax return and did not claim the CGT small business concessions in relation to the sale of the goodwill. The previous tax agent did not discuss the availability of any concessions with the company director. The aggregated turnover of the company for the relevant year was more than $2 million. The net asset value of the company, its affiliates and connected entities was less than $6 million. X is the sole shareholder and director of the company.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 103-25 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Subdivision 152-D

Reasons for decision: Detailed Reasoning - Basic conditions: 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'. Each concession also has further requirements that you must satisfy for the concession to apply. The Advanced guide to capital gains tax concessions for small business 2013-14 (NAT 3359) provides a detailed explanation of the conditions for each concession. In this case, it is accepted that the company met the basic conditions due to the following: • a CGT event will occurred when the goodwill was disposed of • the event resulted in a gain • the company satisfied the maximum net asset value test; and • we consider that the asset meets the active asset test. | Detailed Reasoning - Retirement exemption: The rules covering the small business retirement exemption are contained in Subdivision 152-D of the ITAA 1997. An entity may choose to disregard all or part of a capital gain under the retirement exemption if certain conditions are satisfied. If the entity is a company, they can choose to disregard all or part of a capital gain where all of the following conditions are met: • the company satisfies the basic conditions • the company satisfies the significant individual test (that is, there was at least one significant individual just before the CGT event) • a written record of the amount disregarded is kept and if there are more than one CGT concession stakeholders, each stakeholder's percent of the exempt amount (one may be nil, but together they must add up to 100%) (section 152-315 of the ITAA 1997) • a payment is made to at least one of the CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount within seven days of making the choice (section 152-325 of the ITAA 1997); • Note: If a CGT concession stakeholder is under 55 years of age just before a payment is made in relation to them, the company must make the payment by contributing it to a complying superannuation fund or RSA on their behalf; and • the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less. In this case, it has already been determined that the company met the basic conditions in relation to the sale of the goodwill. As X was the sole shareholder, the significant individual test will also be met. Accordingly, provided that the choice is made in writing and that a payment is made to the CGT concession stakeholder in accordance with section 152-325 of the ITAA 1997, the company will meet all of the requirements to apply the small business retirement exemption. | Detailed Reasoning - Making a choice: The general rule is that a choice available under the CGT provisions once made cannot be changed. Generally, such a choice must be made by the time the income tax return is lodged, or within such further time as the Commissioner allows (subsection 103-25(1) of the ITAA 1997). Under subsection 103-25(2) of the ITAA 1997, the way you prepare your income tax return is sufficient evidence of the making of the choice. Paragraph 103-25(3)(b) of the ITAA 1997, however, contains an exception in relation to the small business retirement exemption, as subsection 152-315(4) of the ITAA 1997 requires the choice for this exemption to be made in writing. In determining if the Commissioner should use his discretion to allow an extension of time the following will be considered: • there should be evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension; • account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension; • account must be had of any unsettling of people, other than the Commissioner, or of established practices; • there must be a consideration of fairness to people in like positions and the wider public interest; • whether there is any mischief involved; and • a consideration of the consequences. | Detailed Reasoning - Application to your circumstances: Due to the advice of the company's previous accountant, the relevant concessions had not been considered and effectively a choice has not been made. We consider this to be an acceptable explanation for the period of extension required. There would be no prejudice to the Commissioner or unsettling of people by allowing the extension. There is no mischief involved. The Commissioner considers it fair and equitable in these circumstances to exercise his discretion. An extension of time is allowed for the company to make the choice to apply the retirement exemption.