Private ruling: Capital gains tax - small business concessions - 15 year retirement exemption
Date of advice: 5 December 2017
Published: April 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the capital gains tax (CGT) 15 year exemption apply to the capital gain from the disposal of the CGT asset? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-78 | Income Tax Assessment Act 1997 Section 152-110 | Income Tax Assessment Act 1997 Section 328-115 | Income Tax Assessment Act 1997 Section 328-120 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 328-135 | Income Tax Assessment Act 1997 Section 328-140

Reasons for decision: Detailed Reasoning - Small business concessions: To qualify for the small business concessions you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. If the basic conditions are satisfied the small business retirement exemption can be applied. The company meets all of the requirements for the small business 15 year exemption and can disregard any capital gain made on the sale of the farming land. Accordingly, it is not necessary to consider the other concessions. | Detailed Reasoning - Basic conditions: A capital gain that you make may be reduced or disregarded under Division 152 of the Income Tax Assessment Act 1997 (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 would have resulted in a gain ● the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and ● at least one of the following applies; ● you are a 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. | Detailed Reasoning - Active asset test: The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 test period; 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 7.5 years during the test period. The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. In your case, the business ceased less than 12 months before the CGT event occurred. Accordingly, the relevant period is from the acquisition date to when the business ceased. As you owned the property for less than 15 years, the property will need to have been active for at least half of the test period. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. However, paragraph 152-40(4)(e) of the ITAA 1997 states that an asset whose main use is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. This exclusion may not apply to a CGT asset leased to an affiliate or connected entity. In these cases, it is the use of the asset in the affiliate’s or connected entity’s business that will determine the active asset status of the asset. | Detailed Reasoning - Connected entity: The meaning of a connected entity is defined under section 328-125 of the ITAA 1997. An entity is connected with another entity if either entity controls the other entity, or if both entities are controlled by the same third entity. An entity controls another entity if it: ● beneficially owns or has the right to acquire beneficial ownership of, interests in the other entity that give the right to receive at least 40% (the control percentage) of any distribution of income or capital by the other entity, or ● if the other entity is a company, beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company. Special rules for the control of a discretionary trust are contained in subsection 328-125(4) of the ITAA 1997. A beneficiary is taken to control a discretionary trust where, for any of the four income years before the year for which relief is sought for a CGT event: ● the trustee paid to, or applied for the benefit of, the beneficiary or their affiliates, or both the beneficiary and any of its affiliates, any of the income or capital of the trust, and ● the amounts paid or applied were at least 40% (the control percentage) of the total amount of income or capital paid or applied for that income year. The control tests for the ‘connected with’ rules are designed to look through business structures that include interposed entities. If an entity (the first entity) directly controls a second entity, the first entity will also be taken to control any entity directly controlled by the second entity (subsection 328-125(7) of the ITAA 1997). | Detailed Reasoning - Small business 15 year exemption: For a company to be eligible for the small business 15-year exemption it must satisfy the basic conditions and three further conditions: ● the company continuously owned the CGT asset for the 15-year period ending just before the CGT event happened, and ● the company had a significant individual for a total of at least 15 years of the whole period of ownership (even if it was not the same significant individual during the whole period), and ● the individual who was a significant individual just before the CGT event was ● at least 55 years old at that time and the event happened in connection with their retirement, or ● permanently incapacitated at that time. The farming land was purchased by the company in 19xx and 19xx and accordingly has been held continuously for more than 15 years. An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. ‘B’ has held 50% of the shares in the company since its incorporation. Accordingly ‘B’ is a significant individual. ‘B’ is over 55 years of age and it is accepted that the CGT event will be in connection with Malcolm’ retirement. Accordingly, the company meets the additional requirements and is entitled to the small business 15 year exemption. Where you can apply the small business 15 year exemption, any capital gain is entirely disregarded, accordingly it is unnecessary to consider the other concessions.

Relevant facts: ‘A’ Pty Ltd (the company) was incorporated in 199X with a share capital of two ordinary fully paid shares. | ‘B’ and ‘C’ were appointed as directors of the company a number of years later. | Both ‘B’ and ‘C’ each acquired 1 ordinary share in the company at the same time. | The Company acquired farm land at various times. | The company conducted a farming business from the land from the dates of acquisition until 30 June 2010. | From 1 July 2010 the farm land was used in the farming business carried on by a trust ‘D’. | ‘D’ is a discretionary trust established by deed (Trust deed) by ‘E’ (Trustee Company) as trustee. | ‘F’ is the child of ‘B’ and ‘C’ and is the primary beneficiary of the trust and is the sole director/ secretary and shareholder of the trustee company. | ‘B’ and ‘C’ are secondary beneficiaries of the trust under the trust deed. | For the period between 1 July 2010 and 30 June 2017, the trustee acted in accordance with the directions of ‘B’ with respect to the farming operations conducted by the trust on the farm land owned by the company. | The trustee company has nominated ‘B’ and ‘F’ as the controllers of the trust. | The company has disposed of the farming land. | The maximum net assets of the company are greater than $6 million. | The aggregated turnover of the trust for the 2016-17 financial year was below $2 million. | ‘B’ is over 55 and as a result of the disposal of the farming land has now retired.