Private ruling: Income tax - Capital gains tax - Small business relief - 15 year exemption
Published: December 2014
Ruling period: Year ended 30 June 2015 to year ended 30 June 2024
Date scheme commenced: In the year beginning 1 July 2014

Ruling: Q1: Will the Commissioner extend the time limit in paragraph 152-125(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) from two years to nine years in accordance with subsection 152-125(4) of the ITAA 1997, so that the payments made to a capital gains tax (CGT) concession stakeholder can be disregarded under subsection 152-125(2) of the ITAA 1997? | A1: Yes

Relevant facts and circumstances: You are a private trading entity incorporated as a proprietary company limited by shares. You have equal shareholders who have been shareholders since the inception of the company. The business has been continuously owned and operated. You intend to sell the business in 20XX to a company which will be established by your current employees. The business will be sold as a going concern for a fixed price excluding GST. An initial payment will be made on the date of settlement and the balance will be paid by monthly instalments with interest accruing at 5% per annum. The purchasing entity will complete payment in full by year ended 30 June 2024. Consideration for the sale of business will represent the market value for the written down value of the net business assets and the remainder will comprise of goodwill. You will provide vendor finance to the purchasing entity and charge interest at a commercial rate. The purchasing entity will provide security over the loan. The sale will be conducted on an arm's length basis on fair and equitable terms.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 152-105 | Income Tax Assessment Act 1997 section 152-110 | Income Tax Assessment Act 1997 subsection 152-125(1) | Income Tax Assessment Act 1997 paragraph 152-125(1)(b) | Income Tax Assessment Act 1997 subsection 152-125(2) | Income Tax Assessment Act 1997 subsection 152-125(4)

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise indicated. The Commissioner will extend the time limit in paragraph 152-125(1)(b) so that payments made to a capital gains tax (CGT) concession stakeholder can be extended from two years to nine years. | Detailed Reasoning - Detailed reasoning: Division 152 provides for concessional reduction of capital gains in prescribed circumstances. It creates four mechanisms for the reduction of capital gains made by small businesses. A small business entity may be able to reduce its capital gains using the small business concessions in Division 152 if the basic conditions under Subdivision 152-A are satisfied. Subsection 152-10(1) would then operate such that a capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded if the following basic conditions are satisfied: a) a CGT event happens in relation to a CGT asset of yours in an income year; 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 152-10(1A) or 152-10(1B) are satisfied in relation to the CGT asset in the income year; d) the CGT asset satisfies the active asset test (see section 152-35). The 15-year exemption rule for companies or trusts conducting a small business is contained in section 152-110. You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years where: a) the basic conditions in Subdivision 152-A are satisfied for the gain; b) the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event; c) the entity had a significant individual at all times during the whole period the entity owned the CGT asset; and d) the significant individual just before the CGT event was either: (i) 55 or over and the event happened in connection with the individuals retirement; or (ii) permanently incapacitated. The distributions made by the company of that exempt amount to a CGT concession stakeholder is not included in the assessable income of the CGT concession stakeholder if the company makes the payment within two years after the CGT event. In determining the taxable income of the company, the trust, the individual, or any of the interposed entities, subsection 152-125(2) requires you to disregard the total amount of the payment or payments made to the CGT concession stakeholder, up to the following limit: Stakeholder's participation percentage × Exempt amount Moreover, the Commissioner may exercise his discretion under subsection 152-125(4) and allow further time to make payments to the concessional stakeholder. The discretion in subsection 152-125(4) simply states that: (4) The Commissioner may extend the time limit under paragraph (1)(b) In determining the circumstances in which the Commissioner may be expected to exercise his discretion, the Explanatory Memorandum to Tax Laws Amendment (2006 Measures No. 7) Act 2007 provides the following guidance: 1.62 There is a requirement that the company or trust make the payments relating to the exempt amount within two years of the CGT event. To take into account actual taxpayer circumstances and commercial practices, the Commissioner has a discretion to extend this time limit. This amendment addresses Recommendation 10.4 of the Board of Taxation report. [Schedule 1, item 45, subsection 152-125(4)] Each request for the exercise of the discretion under subsection 152-125(4) will be considered on a case by case basis after taking into account the individual circumstances and commercial practices of each case. The NAT 3359 Advanced guide to capital gains tax concessions for small business 2013-14 also provides general guidance under the heading 'Extensions of time'. The range of factors that the Commissioner will consider in allowing an extension of time includes: a) whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension; b) whether there is any prejudice to the Commissioner if the additional time is allowed (however, mere absence of prejudice is not enough to justify the granting of an extension); c) whether there is any unsettling of people, other than the Commissioner, or of established practices; d) the need to ensure fairness to people in like positions and the wider public interest; e) whether there is any mischief involved, and the consequences of the decision. | Detailed Reasoning - Application to your circumstances: You have advised that you will satisfy the basic conditions for the small business CGT concessions under Subdivision 152-A and the additional conditions required for eligibility to apply the small business 15 year exemption contained in Subdivision 152-B. You will be entitled to entirely disregard any capital gain you would otherwise have made from the sale of the business. You will provide vendor financing to the purchasing entity and the payments will be made in equal instalments over nine years. Therefore you will not be able to complete distribution of the exempt amount to the CGT concession stakeholder within two years. The sale arrangement will provide an income stream for the retirement of the concession stakeholders and allow the purchasing entity to make repayments from future trading profits of the business. In determining whether the discretion in subsection 152-125(4) will be exercised, the Commissioner has considered the following factors: a) there is an acceptable explanation for the period of the extension you seek. You need to provide vendor finance and allow the purchasing entity to make repayments from funds derived from trading profits. It is commercially necessary for the proceeds of sale to be received and paid out over a nine year period. b) base on the facts specific to this decision, allowing the extension will not prejudice the Commissioner. c) other people have a right to request for an extension of time which will be based on the individual facts of their case. As such, there appears to be no unsettling of other people or established practices. d) there is no evidence of a lack of consideration of fairness between you, other people in like positions and the wider public interest. e) there does not appear to be any mischief involved based on the facts of the case. f) the unintended consequence of not granting the extension is to deny exemption to company CGT concession stakeholders where the delay provides you with no apparent benefit. Based on the above, the Commissioner will extend the time limit in paragraph 152-125(1)(b) from two years to nine years in accordance with subsection 152-125(4). However, any payments made in excess of the concession stakeholder's participation percentage limit will be included in their assessable income for the relevant years.