Private ruling: Small business concessions – 15 year exemption – exempt payments to CGT concession stakeholders
Date of advice: 1 August 2018
Published: October 2018
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Would the 15-year exemption have applied to the capital gain made on the disposal of the asset owned by Company A, except for the fact that that the gain would be disregarded anyway because the capital gains tax (CGT) asset was acquired before 20 September 1985? | A1: Yes. | Q2: If Company A disposes of the asset and makes one or more payments to the CGT concession stakeholders, can the exempt amount of the capital gain be excluded from the stakeholder’s assessable income if the payment is made within two years of the CGT event? | A2: Yes.

Relevant facts and circumstances: Company A commenced trading as an estate agent in 19XX. The company has sold the asset and as a result CGT event A1 has happened and a capital gain has occurred. The company is a small business entity for the income year. The company has continuously owned the asset for more than 15 years and the asset has been used in the course of carrying on a business. The company satisfies all of the requirements of section 152-110 of the ITAA 1997 and intends to disregard the capital gain arising. The company is distributing the proceeds from the capital gain to the CGT concessional stakeholders equally as per the stakeholder’s participation percentage which will occur in the next 2 years. The stakeholders are CGT concession stakeholders of the company and satisfy the requirements of section 152-125 of the ITAA 1997 so that they are able to receive the CGT exempt payment/s as calculated under subsection 152-125(2) of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-35(1) | 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 subsection 152-70(1) | Income Tax Assessment Act 1997 section 152-110 | Income Tax Assessment Act 1997 section 152-125

Reasons for decision: Detailed Reasoning - Small business relief: 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’. The basic conditions are contained in Subdivision 152-A of the ITAA 1997. | Detailed Reasoning - Basic conditions: A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied: ● a CGT event happens in relation to a CGT asset of yours in an income year ● the event results in a gain ● the CGT asset satisfied the active asset test in section 152-35 of the ITAA 1997, and ● at least one of the following applies: ● you are a CGT small business entity for the income year; ● you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997; ● you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership; or ● 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 (section 152-10 of the ITAA 1997). | Detailed Reasoning - Active asset test: 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. A CGT asset satisfies the active asset test if: (a) you have owned the asset for 15 years or less and the asset was an active asset of your for a total of at least half of the test period; or (b) you have owned the asset for more than 15 years and the asset was an active asset of your for a total of at least 7½ years during the test period (subsection 152-35 of the ITAA 1997). | Detailed Reasoning - CGT small business entity: You will be a small business entity for the purposes of the small business concessions if you are an individual, partnership, company or trust that: ● is carrying on a business; and ● has an aggregated turnover of less than $2million. | Detailed Reasoning - CGT concession stakeholder: 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. 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%. This 20% can be made up of direct and indirect percentages. 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. Section 152-110 of the ITAA 1997 addresses the 15-year exemption as it applies to companies and trusts. Under this section, the entity can disregard any capital gain arising from the disposal of an asset if all of the following conditions are satisfied: (a) the basic conditions in Subdivision 152-A are satisfied for the gain (b) the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event (c) the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset; and (d) an individual who was a significant individual of the entity just before the CGT event was either: (i) at least 55 years old at that time and the event happened in connection with their retirement; or (ii) permanently incapacitated at that time. | Detailed Reasoning - Distributions of the exempt amount: Section 152-125 of the ITAA 1997 provides that, if a capital gain made by a company is disregarded under the small business 15-year exemption, or would have been except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985, any distribution made by the company of that exempt amount to a CGT concession stakeholder is not included in the assessable income of the CGT concession stakeholder, and not deductible to the company, if the following conditions are satisfied: ● the company makes a payment within two years after the CGT event that resulted in the capital gain or, in appropriate circumstances, such further time as allowed by the Commissioner; ● the payment is made to an individual who was a CGT concession stakeholder of the company just before the CGT event; and ● the total payments made to each CGT concession stakeholder does not exceed an amount determined by multiplying the CGT concession stakeholders control percentage by the exempt amount. | Detailed Reasoning - CGT event A1 – Disposal of a CGT asset: CGT event A1 happens if an entity disposes of a CGT asset (subsection 104-10(1) of the ITAA 1997), such as when an asset is transferred from one entity to another by way of sale or gift. If the asset is disposed of under a contract, CGT event A1 happens when the contract is entered into, or if there is no contract, when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997). If an asset is acquired as a result of CGT event A1 happening the asset is acquired when the disposal contract is entered into or, if none, when the disposing entity stops being the asset’s owner (subsection 109-5(2) of the ITAA 1997). A capital gain you make is disregarded if you acquired the asset before 20 September 1985 (paragraph 104-10(5)(a) of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: In this case, as the asset is a pre-CGT asset, that is, it was acquired before 20 September 1985, any capital gain it makes from the disposal of the asset will be disregarded under paragraph 104-10(5)(a) of the ITAA 1997. However, if the property was not a pre-CGT asset, Company A would qualify for the small business 15-year exemption because: ● Company A would satisfy the basic conditions ● Company A will have owned the asset for over 15 years ● Company A will have had a significant individual for a total of at least 15 years during which it has owned the CGT asset, and ● Company A will have had a significant individual who will be over 55 just before the disposal of the property and the disposal of the property will happen in connection with their retirement. As such, provided the payment of the exempt amount is made to the shareholders within two years of the CGT event and it does not exceed an amount determined by multiplying their control percentage by the exempt amount the payment will not be included in their assessable income.