Private ruling: Capital gains tax – small business concessions – company sells real property
Date of advice: 10 April 2018
Published: June 2018
Ruling period: 2017-18 income year | 2018-19 income year
Date scheme commenced: 1 July 200A

Ruling: Q1: Is Company D a CGT small business entity? | A1: Yes. | Q2: Will Company D satisfy the requirements of section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the sale of the Property? | A2: Yes.

Relevant facts and circumstances: The following entities are relevant to the questions raised: Company D Pty Ltd ( Company D ): ● Was registered with ASIC in 200A ● Is just over F% owned by an unrelated individual ● Owns the property that is the subject of this ruling (the Property ) which is at least G% of the market value of assets it owns Company P Pty Ltd ( Company P ): ● Was registered with ASIC in 200A ● Owns the business that operates out of the Property owned by Company D ● The Family (the ) ● Has owned G% of the shares in Company P since 200B ● Acquired C% of Company D in 200B, later increased to H% and then about E% ● Ceased operating a share trading business during the 2015-16 income year ● Has not carried on a business since the share trading activity ceased ● Does not have any other affiliates ● Is not connected to any other entities that carry on business ● Has a corporate ee The Director ( Director ) is aged more than 55 years: ● Has owned D% of the shares in Company D since 200A ● Has owned D% of the shares in Company P since 200A ● Beneficially owns all the shares in the ee Company ● Is the sole director of Company D, Company P and the ee Company ● Does not carry on any businesses in their own name ● Does not have any other affiliates ● Is not connected to any other entities that carry on business ● The unrelated individual does not carry on any businesses in their own name or in the name of any other associated entities and none of those entities have any other connection to Company D or Company P. Company D acquired the Property some 15 years ago for use in a business to be carried on by Company P. It needed extensive work done prior to the commencement. Preparatory works commenced shortly after purchase and the construction of the main facility commenced about six months later. The first clients moved in about 14 years ago. They were clients of another business then conducted by other entities run by associated entities. Company P has operated the business from the Property from when the initial fitout was completed. The rent charged by Company D to Company P is lower than market reflecting the close family relationship between the companies. Company D has regularly paid expenses on behalf of Company P (and vice versa) and has subsequently been reimbursed. Company D has constructed facilities of a type and in a timeframe in accordance with the requirements of Company P. Company D has progressively built additional facilities on the Property each time the facility approached capacity. The 2016-17 income year provides representative figures for the operation of the Property. During this year, Company P earned about $1,000,000 from operating the business and paid about $350,000 to Company D for the use of the Property. Company D also earns some minor amounts of interest unrelated to the Property. Company P is an affiliate of Company D. The Property is an active asset and meets the active asset test being used in the business carried on by Company P (as an affiliate of Company D). The shares owned by the Director and the in Company D are active assets and meet the active asset test as the Property, other active assets owned by Company D and associated assets have been greater than G% of the market value of all its assets for more than seven and a half years of the time they have owned the Company D shares (or more than half the ownership period where it is less than 15 years). The shares owned by the Director and the in Company P are active assets and meet the active asset test as the active assets owned by Company P and associated assets have been greater than G% of the market value of all its assets for more than seven and a half years of the time they have owned the Persis shares (or more than half the ownership period where it is less than 15 years). The Director, the , Company P and Company D each pass the maximum net asset value test as the net value of their CGT assets and the CGT assets of their connected entities and affiliates is less than $6,000,000. The shareholders of Company D and Company P have received several expressions of interest in acquiring either the shares in those companies or their assets. Assumptions For the purpose of this ruling, it is assumed that the following events will occur during the period of the ruling: ● Company D will continue to derive income consistent with the amount disclosed above while it continues to own the Property ● Company P will continue to derive income consistent with the amount disclosed above while it continue to own the business ● No other related entity will operate a business activity ● Company P will sell its business (including the Goodwill) ● Company D will sell the Property ● The will distribute all of its income from the sale year to the Director and the Director’s spouse, and ● The Director will retire as part of the sale transaction.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 Subdivision 328-C

Reasons for decision: Summary: Company D is a CGT small business entity. | Detailed Reasoning - Detailed reasoning: A CGT small business entity for an income year is a small business entity with an aggregated turnover under $2,000,000 (instead of $10,000,000). A small business entity for an income year (the current year) is a business that either: ● Had an aggregated turnover of less than $10,000,000 in the previous year, or ● Is likely to have, or actually has an aggregated turnover of less than $10,000,000 for the current year. However, an entity is not a small business entity for an income year if it carried on business in the two previous income years, and its aggregated turnover in each of those years was $10,000,000 or more. The aggregated turnover is the annual turnover of: ● The entity itself ● Any other entities that are connected with the first entity, and ● Any other entities that are affiliated with the first entity. There are anti-overlap rules so that the same amount is not counted twice. An entity’s annual turnover for an income year is its total ordinary income for that year that it derives in the ordinary course of carrying on a business (excluding GST). Company D’s situation Company D owns the property from which Company P conducts the business activity. Company D charges rent to Company P. Ordinarily, the derivation of rent does not constitute business income. However, the Commissioner has recently issued Draft Taxation Ruling TR 2017/D7 which concludes that companies may be carrying on a business in instances where an individual or undertaking exactly the same activity may not be in business. The activities of Company D are intimately linked to the activities of Company P who carries on the business activity. It is clear that if one company owned the property and conducted the business activity that the whole arrangement would be considered to be one business. There is no good reason to conclude that one part of the activity should be considered to be a business and the other not merely because they are owned by different entities for sound commercial reasons. Consequently, the Commissioner will accept that Company D is earning business income in the form of the rents that it receives from Company P and that it is an affiliate of Company P. Company P is the only entity that is connected or affiliated with Company D that currently conducts any form of business activity. Company P’s annual turnover for the purpose of this ruling is about $1,000,000 and Company D turns over about $350,000. But this $350,000 is not counted as Company D receives it from Company P (the anti-overlap rule). Therefore the aggregated turnover is about $1,000,000 which is below the $2,000,000 threshold. It is reasonable to apply these conclusions to the year that the Property will be sold. Consequently, Company D is a CGT small business entity and will continue to be a CGT small business entity until the Property is sold. | Summary: Company D will satisfy the requirements of section 152-110 of the ITAA 1997 in respect of the sale of the property. | Detailed Reasoning - Detailed reasoning: Section 152-110 of the ITAA 1997 provides a CGT exemption if certain exemption conditions are satisfied. The relevant conditions for a company selling real property are: ● The basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the capital gain ● The company seeking the CGT exemption has continuously owned the real property for the 15 years period ending just before the time of the CGT event ● The company had a significant individual for a total of at least 15 years during which the company owned the real property, and ● The significant individual is 55 years or over at the time of the CGT event and the event happens in connection with their retirement. The basic conditions for a company selling real property are: ● A CGT event happens to the real property owned by the taxpayer ● The event would have resulted in a capital gain (before the application of Division 152 of the ITAA 1997) ● The company passes one of the owner tests, and ● The real property satisfies the active asset test. Additional conditions need to be met if payments made to the CGT concession stakeholders in connection with the event are to be exempt from tax. Company D’s situation CGT event A1 will happen when Company D sells the Property resulting in a capital gain for Company D (prior to the application of the CGT small business concessions). Company D is a CGT small business entity for the reasons given above (and therefore passes an owner test). The Property is an active asset and meets the active asset test because Company P is an affiliate and Company P has used the Property in the business it has conducted for at least seven and a half years of the time that Company D has owned the Property. Company D acquired the Property in 200A and has held it continuously for 15 years. The Director holds D% of the Company D shares and this gives the Director D% of the voting power in Company D, any dividend paid by Company D and any distribution of capital to be made that might be made by Company D. Therefore, the Director’s direct small business participation percentage is also D%. Holding a direct small business participation percentage in Company D of D% is sufficient to make the Director a significant individual in Company D and also a CGT concession stakeholder in Company D. The Director also holds an indirect small business participation percentage in Company D through the , but it is not necessary to work it out as the direct interest is sufficient to meet the required threshold. The Director is over 55 year of age and will retire in connection with the sale of the Property. Therefore, Company D meets all of the conditions listed above and qualifies for and will be eligible for the CGT exemption provided by section 152-110 of the ITAA 1997 in respect of the sale of the Property. Distribution by Company D of the exempt capital gain The exemption received by Company D can flow through to individuals who are its CGT concession stakeholders if Company D distributes the exempt capital gain to them within two years of the date of the CGT event for the sale of the Property. The amount of the exemption for each CGT concession stakeholder is limited to: That stakeholder’s participation percentage x The exempt capital gain The stakeholder’s participation percentage is generally related to the small business participation percentage. The Director has a direct participation percentage in Company D of D%. The unrelated individual has a direct participation percentage in Company D of just over F%. The extent to which the Director and the Director’s spouse have indirect small business participation percentages through the depend on the distributions made to them in the sale year. Note: This private ruling applies the CGT small business concessions as currently enacted. It does not consider the possible application of announced but unenacted legislation that may have effect from 1 July 2017. Paragraph 51 of Taxation Ruling TR 2006/11 (paraphrasing section 357-85 of Schedule 1 to the Taxation Administration Act 1953 ) states: | Detailed Reasoning - The status of private rulings following a rewrite of the law: 51. Where a relevant provision is re-enacted or remade, an earlier private ruling is taken to be about the re-enacted or remade provision insofar as the new law expresses the same ideas as the old law. However, if the law has been substantively changed, the part of the private ruling dealing with the changed law ceases to apply.