Private ruling: CGT small business concessions
Published: November 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: The scheme has commenced

Ruling: Q1: 1. Is the payment received by the entity in relation to the termination of a lease agreement assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A8: Yes


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 115-10 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 328-130 | Income Tax Assessment Act 1997 Section 152-20 | Income Tax Assessment Act 1997 Section 152-205 | Income Tax Assessment Act 1997 Section 152-305

Reasons for decision: Detailed Reasoning - Is the Lease Surrender Payment Assessable under Section 6-5 of the ITAA 1997?: A lease surrender payment received by a lessee is considered to constitute assessable income under section 6-5 ITAA 97 (TR 2005/6), if received: (a) in the ordinary course of carrying on a business of trading in leases; (b) as an ordinary incident of business activity (even though it was unusual or extraordinary compared to the usual transactions of the business); or (c) as a profit or gain from an isolated business operation or commercial transaction entered into by the lessee (otherwise than in the ordinary course of carrying on a business), with the intention or purpose of making the relevant profit or gain.' You are not in the business of trading leases and the lease surrender payment is not considered to be a receipt that is a usual incident of the business you carry on. You had exercised your option to extend the lease by a further 4 year term, prior to being aware that the landlord was to sell its freehold interest to a third party. You did not exercise the option to renew the lease, in order to enhance your position in terms of a higher lease termination payment being negotiated. The lease surrender payment is not considered to be assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Is the Lease Surrender Payment Assessable under Section 104-10 of the ITAA 1997?: You acquired the interest in the lease, being an asset, after the introduction of CGT on 19 September 1985. CGT event A1 (section 104-10 of ITAA 1997) occurs when a lease is surrendered by the lessee [and it is not deemed income assessable under section 6-5 as determined above]. TR 2005/6 provides that a capital gain arises if the capital proceeds of the surrender receipt exceed the cost base of the lease (including any non-deductible premium paid by the lessee for the grant of the lease). A capital loss occurs if capital proceeds are less than the asset's reduced base cost. It is considered that on the surrender of the lease a capital gain may arise due to the CGT event A1. | Detailed Reasoning - Is the lease surrender considered an active asset?: An active asset is defined in section 152-40 of the ITAA 1997 as an asset that is owned by you and is: • used or held ready to 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, or • an intangible asset inherently connected with a business carried on ( whether alone or in partnership), by you, your affiliate, your spouse or child, or another entity that is connected with you, carries on for example, goodwill. The surrender of a right under a lease is a disposal of an active asset, as it satisfies the definition of an active asset according to paragraph 152-40(b). It is a tangible asset that is inherently connected with a business that is carried on. You also meet the requirements of section 152-35 of the ITAA 1997. You have held an interest in the asset for a period, which is less than 15 years and at the time of the lease surrender, you will have used the commercial unit, solely and wholly in the course of carrying on your business, for the entire duration of lease. The asset is not one of those which specifically cannot be an active asset; as listed at subsection 152-40(4) of the ITAA 1997. The lease is considered to be an active asset. | Detailed Reasoning - Do you satisfy the basic conditions to access the CGT concessions in section 152-10 of the ITAA 1997?: Subsection 152-10(1) of the ITAA 1997 lists the basic conditions for CGT relief in Subdivision 152-A of the ITAA 1997. Specifically, it is considered that the following legislation is of relevance: (1) A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain: (a) a CGT event happens in relation to a CGT asset of yours in an income year; Note: This condition does not apply in the case of CGT event D1: see section 152- 12. (b) the event would (apart from this Division) have resulted in the gain; (c) at least one of the following applies: (i) you are a small business entity for the income year; (ii) you satisfy the maximum net asset value test (see section 152-15); (iii) 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; (iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; Note: For determining whether an entity is a small business entity, see Subdivision 328-C (as affected by sections 152-48 and 152-78). (a) the CGT asset satisfies the active asset test (see section 152- 35). Note: This condition does not apply in the case of CGT event D1: see section 152- 12. The maximum net asset value test is described at section 152-15 of the ITAA. You satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000: (a) the net value of the CGT assets of yours; (b) the net value of the CGT assets of any entities connected with you; (c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)). Note 1: Some assets are not included in the definition of net value of the CGT asset: see subsections 152-20(2), (3) and (4). Note 2: The meaning of connected with is affected by section 152-78.' You have applied these rules to your set of facts and have stated that you satisfy the basic conditions for CGT SBC relief, as CGT A1 event will occur on surrender of the lease (the CGT asset), which will result in a capital gain (subject to the application of the CGT SBCs) and furthermore, you will satisfy the maximum $6million net asset value test. | Detailed Reasoning - Does the 50% Active Asset Reduction at Subdivision 152-C of the ITAA 1997 apply to the gain made by the Taxpayer?: Section 152-205 of the ITAA 1997 provides that a Taxpayer will qualify for the small business 50% reduction where: '......the basic conditions in Subdivision 152-A are satisfied for the gain.' You satisfy the basic conditions of subdivision 152-A; therefore it is considered that the 50% active asset reduction applies to the gain. | Detailed Reasoning - Does the Small Business Retirement Exemption at Subdivision 152-D of the ITAA 1997 apply?: You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. Subsection 152-305(2) of the ITAA 1997 provides that a company or a trust can choose to disregard all or part of a capital gain if: • you satisfy the basic conditions • you satisfy the significant individual test • you keep a written record of the amount you choose to disregard (the exempt amount) and, if there are more than one CGT concession stakeholders, each stakeholder's percentage of the exempt amount (one may be nil, but together they must add up to 100%) • you make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount • the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and • where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession (up to the asset's CGT exempt amount). If a CGT concession stakeholder is under 55 years old just before receiving a payment, an amount equal to that payment must be immediately paid to a complying superannuation fund or RSA on their behalf. The company or trust must notify the trustee of the fund or the RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption. There is no requirement to make this contribution if the stakeholder was 55 years old or older. You must make payments: • seven days after you choose to disregard the capital gain if you choose the retirement exemption for a J2, J5 or J6 event, or • in any other case, by the later of • seven days after you choose to disregard the capital gain, and • seven days after you receive the capital proceeds from the CGT event. Therefore, if you choose the retirement exemption after you have received the capital proceeds (for example, when you lodge your tax return) there is no requirement to make any payment until you have made the choice. Accordingly, you may use the capital proceeds for other purposes before choosing. However, once you choose, you must make the payment by the end of seven days after making the choice. The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) must not exceed your 'CGT retirement exemption limit' or, in the case of a company or trust, 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. This includes amounts disregarded under former (repealed) retirement exemption provisions. You satisfy all the basic conditions and the significant individual test, accordingly, you satisfy all the necessary conditions to be eligible to apply the retirement exemption. The individual holds and will continue to hold, a 100% interest in the entity. They will therefore have a qualifying small business participation percentage (SBPP) and will be a significant individual just before the CGT event. They will be a CGT Concession Stakeholder at the time of the CGT Event. You will be entitled to access the small business retirement exemption. The individual will be over 55 years of age at the time a qualifying payment is made, there will be no requirement for the payment (which must be made within the prescribed time limits) to be directed into a complying superannuation fund. | Detailed Reasoning - Can the Small Business Rollover at Subdivision 152-E of the ITAA 1997 apply?: To qualify for the small business rollover, you need to satisfy the basic conditions that apply to all CGT small business concessions. To be eligible for the roll-over relief the following conditions must be met: The taxpayer disposing the asset and acquiring a replacement asset must be a small business entity or own shares in a small business entity. (Section 152-15 of the ITAA 1997) A small business entity is one with a net asset value of $6M or less. (Section 152-15 of the ITAA 1997). The asset disposed of must be an active asset. (Section 152-35 of the ITAA 1997) An active asset is an asset owned directly by you that is used or held ready for use in the course of carrying on a business. (Section 152-40 of the ITAA 1997). A share held in a resident company is an active asset if at least 80% of the company's assets are being used in the carrying on of a business. [Section 152-40(3)]. An active asset can also be property that is temporarily used to derive rental income prior to being used for the purpose of carrying on a business. [Section 152-40(4) of the ITAA 1997]. The asset acquired (the replacement asset) must also be an active asset passing the same tests referred to above. (Sections 152-35 & 152-40 of the ITAA 1997). The replacement asset must be acquired within the replacement asset period, starting one year before, and ending two years after the last CGT event in the income year for which you obtain the rollover. (Section 104-185 of the ITAA 1997). You may choose to apply the small business rollover to as much of the capital gain as you decide, as you have met all the necessary requirements. | Detailed Reasoning - Is the Surrender of Lease for Consideration a GST Taxable Supply?: In accordance with subsection 7-1(1) of the GST Act, GST is payable on taxable supplies. Under section 9-5 of the GST Act, an entity makes a taxable supply if: • it makes a supply for consideration; • the supply is made in the course or furtherance of an enterprise that it carries on; • the supply is connected with Australia; and • the entity is registered, or required to be registered for GST. The entity is making a taxable supply when it surrenders its rights to lease commercial premises from the lessor. Consideration is defined in subsection 9-15(1) of the GST Act to include any payment, act or forbearance in connection with, in response to or for the inducement of a supply of anything. The entity is receiving a lump sum payment to vacate the premises. You are registered for GST purposes. The surrender of the lease by you is neither a GST-free nor an input taxed supply, it is therefore taxable in nature and will be subject to GST at 10%.

2. Is the payment received by the entity in relation to the termination of a lease agreement capital in nature and assessable under section 104-10 of the ITAA 1997? | 3. Is the surrender of the right under the lease considered to be the disposal of an active asset of the entity? | 4. Does the entity satisfy the basic conditions to access the CGT concessions in section 152-10 of the ITAA 1997? | 5. Does the 50% Active Asset reduction at Subdivision 152-C of the ITAA 1997 apply to the entity? | 6. Does the Small Business Retirement Exemption at subdivision 152-D of the ITAA apply to the entity? | 7 Does the Small Business Rollover at subdivision 152-E of the ITAA 1997 apply to the entity? | 8. Is the agreement by the entity to surrender the lease in return for a payment from the Lessor a taxable supply within the meaning of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act')? | Relevant facts: The entity is owned by an individual. | The entity is the leaseholder of a commercial property which has been used wholly in the course of conducting its business since the lease was entered into. The business has been conducted for approximately 20 years. | The original lease was issued as a 4 year term, subject to an option to renew for a period of 4 years and a subsequent further option to renew for an additional 4 years. | The entity exercised its right to extend the lease of the property for an additional 4 years term, prior to being aware that the landlord intended to sell the freehold interest, once the initial period came to an end. | The landlord (who was party to the lease agreement with the entity) recently sold its freehold interest in the land and property, to a third party, along with the entity, as an in-situ tenant. | The third party is now desirous of taking vacant possession of the land and is likely of offering the entity a lump sum lease surrender payment. | The entity's net asset value for CGT SBC purposes (including those of all entities connected with and affiliates of the entity and entities connected with affiliates of the entity) is less than $6 million.