Private ruling: CGT small business concessions
Published: October 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Is X eligible for the 50% active asset reduction in relation to the disposal of the property? | A1: Yes | Q2: Can X choose to not apply the 50% active asset reduction in relation to the disposal of the property? | A2: Yes | Q3: Is X eligible to choose the retirement exemption in relation to the disposal of the property? | A3: Yes | Q4: If X chooses to apply the retirement exemption in accordance with section 152-315 of the Income Tax Assessment Act 1997 (ITAA 1997), can a non-assessable, non-exempt payment be made to CGT concession stakeholders to comply with section 152-325 of the ITAA 1997 within seven days of making the choice? | A4: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 152-10(1) | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-50 | Income Tax Assessment Act 1997 Section 152-55 | Income Tax Assessment Act 1997 Section 152-60 | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 Section 152-220 | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 Subsection 152-310(2) | Income Tax Assessment Act 1997 Section 152-315 | Income Tax Assessment Act 1997 Section 152-325 | Income Tax Assessment Act 1997 Subsection 152-310(2) | Income Tax Assessment Act 1997 Section 328-125

Reasons for decision: Summary: X will satisfy the basic conditions for the small business concessions and the 50% active asset reduction will apply to the capital gain from the disposal of the property. X can however, choose to not apply the 50% active asset reduction. The additional requirements for the retirement exemption will also be met. If X chooses to apply the retirement exemption in accordance with section 152-315 of the ITAA 1997, a non-assessable, non-exempt payment can be made to the relevant CGT concession stakeholders to comply with section 152-325 of the ITAA 1997 within seven days of making the choice. | Detailed Reasoning - Basic Conditions: In order to be eligible for the small business CGT concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997: (a) a CGT event happens in relation to an asset that the taxpayer owns (b) the event would otherwise have resulted in a capital gain (c) one or more of the following applies (i) the taxpayer satisfies the maximum net asset value test (ii) the taxpayer is a "small business entity" for the income year (iii) the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or (iv) the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year, and (d) the asset satisfies the active asset test. In this case a CGT event will occur when a contract of sale is entered into. The CGT event will result in a capital gain if the capital proceeds exceed the cost base of the asset. Additionally, it is assumed that X will satisfy the maximum net asset value test just before the CGT event. | 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 detailed below, or · you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period. The test period: · begins when you acquired the asset, and · ends at the earlier of · the CGT event, and · when the business ceased, if the business in question ceased in the 12 months before the CGT event (under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months). 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. | Detailed Reasoning - Connected entity: 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 (section 328-125 of the ITAA 1997). | Detailed Reasoning - Direct control of a company: An entity controls a company if the entity, its affiliates, or the entity together with its affiliates beneficially own: · interests in the company that give them the right to receive at least 40% (the control percentage) of any distribution of income or capital; or · equity interests in the company that carry between them the right to exercise at least 40% (the control percentage) of the voting power in the company. | Detailed Reasoning - Direct control of a discretionary trust: Control of a discretionary trust can be via a beneficiary or by an entity that controls the trustee. 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. Alternatively, an entity will control a discretionary trust if the trustee acts, or could reasonably be expected to act, in accordance with the directions of that entity or its affiliates (subsection 328-125(3) of the ITAA 1997). ATO Interpretive Decision ATO ID 2008/139 provides that a person who has the power to remove the trustee of a discretionary trust and appoint a new trustee will control the trust for the purposes of subsection 328-125(3) of the ITAA 1997. | Detailed Reasoning - Indirect control of an entity: 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 - Application to your circumstances: In this case, the property is owned by X and has been used in the business of related parties. As the relevant CGT concession stakeholders control X, and the entities that use the property, they are all connected entities. The property has always been an active asset as it has been used in the business of entities connected with X. Accordingly, the active asset test contained in section 152-35 of the ITAA 1997 is satisfied. Therefore, provided the CGT event results in a gain, the basic conditions in 152-10(1) of the ITAA 1997 will be satisfied. | Detailed Reasoning - Active Asset Reduction: The 50% active asset reduction contained in subdivision 152-C of the ITAA 1997 applies automatically to reduce an eligible capital gain if the basic conditions are met. However, in accordance with section 152-220 of the ITAA 1997, a taxpayer can choose not to apply the 50% active asset reduction. | Detailed Reasoning - Application to your circumstances: As X will meet the basic conditions, the capital gain from the sale of the property that remains after applying any current year capital losses and any unapplied prior year net capital losses will be reduced by 50%. However, X can choose not to apply the 50% active asset reduction. | 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 (section 152-325 of the ITAA 1997) · the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and · where the capital proceeds are received in instalments, a payment is made to a CGT concession stakeholder for each instalment in succession. The payment to the CGT concession stakeholders must be made by the later of seven days after making the choice or seven days after you receive the capital proceeds from the relevant CGT event. The amount of the capital gain the company disregards cannot exceed the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment. An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. 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. There is no requirement to make this contribution if the stakeholder is 55 years or older. | Detailed Reasoning - CGT concession stakeholder: As per section 152-60 of the ITAA 1997 an individual is a CGT concession stakeholder of a company if they are a significant individual or the spouse of a significant individual, where the spouse has a small business participation percentage in the company at that time that is greater than zero. Under section 152-55 of the ITAA 1997 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%. This 20% can be made up of direct and indirect percentages. An entity's direct small business participation percentage in a company is the percentage of: · voting power that the entity is entitled to exercise · any dividend payment that the entity is entitled to receive · any capital distribution that the entity is entitled to receive, or · if they are different, the smallest of the three definitions above. | Detailed Reasoning - Application to your circumstances: As discussed, X will satisfy the basic conditions in relation to the disposal of the property. Based on the assumption that there will be no changes to the shareholdings of X prior to the CGT event, both of the relevant CGT concession stakeholders will have a direct small business participation percentage in X of more than 20%. Accordingly, they will both be significant individuals and the significant individual test will be satisfied. X will be eligible to choose the retirement exemption to disregard all or part of the capital gain. However, there are further requirements that must be met after making the choice. Provided that X meets the requirements of section 152-315 of the ITAA 1997 in relation to making the choice and section 152-325 of the ITAA 1997 in relation to making the payments to CGT concession stakeholders, the eligibility requirements for the small business retirement exemption will be met. | Detailed Reasoning - Payments to CGT concession stakeholders under the retirement exemption: Where a company or trust makes a choice to disregard all or part of a capital gain under the retirement exemption and the company or trust receives capital proceeds from the relevant CGT event, a payment must be made to one or more of the CGT concession stakeholders in accordance with section 152-325 of the ITAA 1997. Where a payment is made to a CGT concession stakeholder to comply with section 152-325 of the ITAA 1997, it is not assessable income and not exempt income of the CGT concession stakeholder (subsection 152-310(2) of the ITAA 1997). Accordingly, if X chooses to apply the retirement exemption in accordance with section 152-315 of the ITAA 1997, a non-assessable, non-exempt payment can be made to the relevant CGT concession stakeholders to comply with section 152-325 of the ITAA 1997 within seven days of making the choice. As the relevant CGT concession stakeholders will both be over the age of 55, there is no requirement that this amount be made by contributing it to a complying superannuation fund or RSA on their behalf. The payment must be made by reference to each individual's percentage of the exempt amount.

The property has been used by related entities in the course of carrying on their business since the acquisition date. | The property has not been used for any other purpose. | It is expected that a contract for the sale of the property will be entered into in the 2013-14 financial year. X will make a capital gain. | The net value of the assets of X and its affiliates and connected entities is less than $6million. | The relevant CGT concession stakeholders will be over 55 years of age at the relevant time. | Both of the relevant CGT concession stakeholders have never used any of their $500,000 capital gains tax (CGT) retirement exemption limit per section 152-320 of the ITAA 1997. | You have provided details of the shareholdings of related companies and trustee and distribution details of the related trusts. | Assumptions: X will meet the maximum net asset value test just before the CGT event occurs. | There will be no changes to the shareholdings of X, or the related entities prior to the CGT event.