Private ruling: Small business concessions - 15 year exemption
Published: June 2013
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the small business 15 year exemption apply to the sale of the property? | A1: Yes | Q2: If not, can the company apply the other small business concessions? | A2: Not applicable, see reasons for decision.

Relevant facts and circumstances: X% of the shares in the company are held by Y. This shareholding has not changed since incorporation. Y is also the director of the company. The company passes the maximum net asset value test. The company owns a property. The property was acquired more than 15 years ago. The commercial property has been leased since its completion. For all but approximately X years, the property has been leased to Z. For the X year period an unrelated party leased the property, however this lease did not work out and the lease reverted back to Z. Z uses the commercial property in its business. It does not on-lease the property. The shares in Z are held by Y and their spouse. The directors of Z are Y and their spouse. You have provided financial statements for the company, and its related entities that show the aggregated turnover for the group in the relevant financial year was below $2million. Y is over 55 years of age. Following the sale of the property, Y will reduce their working hours from 40-50 hours per week to 10-15 hours per week in preparation for retirement.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e) | Income Tax Assessment Act 1997 Subsection 152-40(4A) | Income Tax Assessment Act 1997 Section 152-110 | Income Tax Assessment Act 1997 Section 328-125

Reasons for decision: 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. In this case, when the property is sold, a CGT event will occur in relation to a CGT asset owned by the company and it is expected that this event will result in a capital gain. Additionally, the company satisfies the maximum net asset value test. The active asset test will be considered below. | Detailed Reasoning - Active asset test: The active asset test is contained in section 152-35 of the ITAA 1997. Where you have owned the asset for more than 15 years, the active asset test is satisfied if the asset was an active asset of yours for a total of at least 7.5 years of the test period detailed below. The test period: · begins when you acquired the asset, and · ends at the earlier of o the CGT event, and o when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows). 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 in the course of carrying on the business is to derive rent can not 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. The meaning of a connected entity is defined under section 328-125 of the ITAA 1997 which states as follows: An entity is connected with another entity if: (a) either entity controls the other entity in the way described in this section; or (b) both entities are controlled in a way described in this section by the same third entity. Paragraph 328-125(2)(b) of the ITAA 1997 provides that an entity controls a company if the entity, its affiliates, or the entity together with its affiliates beneficially own equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company. Y holds X% of the shares in the company and X% of the shares in Z. In accordance with paragraph 328-125(1)(b) of the ITAA 1997 the company and Z are connected as they are controlled by the same third entity, Y. Although the company leases the property to Z, Z is connected to the company. Therefore it is the use in Z's business that will determine if the property is an active asset. As Z did not derive rent from the property the exclusion contained in paragraph 152-40(4)(e) of the ITAA 1997 does not apply. The asset will be active for the period that is has been leased to Z, and as this period is more than 7.5 years, the active asset test will be satisfied. Accordingly, the company meets all the basic conditions for the small business concessions. | 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 o at least 55 years old at that time and the event happened in connection with their retirement, or o permanently incapacitated at that time. The property was purchased by the company and 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%. Y has held X% of the shares in the company since its incorporation. Accordingly, Y is a significant individual. Y is over 55 years of age and from the information provided, including the significant reduction in Y's working hours following the sale, it is accepted that the CGT event will be in connection with Y's 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.