Private ruling: Small business concessions
Date of advice: 3 August 2018
Published: September 2018
Ruling period: Year ended 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2017

Ruling: Q1: Can Person A apply the small business 15-year exemption to disregard any capital gain they make on the disposal of the shares they acquired in Company A after 20 September 1985? | A1: Yes. | Q2: Would the small business 15-year exemption apply to the capital gain Company A will make on the transfer of the property, except for the fact that that the gain would be disregarded anyway because the property was acquired before 20 September 1985? | A2: Yes. | Q3: If Company A disposes of the property, can the exempt amount of the capital gain be excluded from Person A’s assessable income if the payment is made within two years of the CGT event? | A3: Yes.

Relevant facts and circumstances: Company A is the owner of a rural property which was purchased prior to 1985. The property has always been used in conjunction with farming and grazing activities. Company A owns no other assets. Prior to 1985, Person A owned some of the shares in the Company A. After 1985, and over 15 years ago, Person A acquired all of the remaining shares in Company A with the exception of one of the 5 A Class Preference Shares. The farming and grazing operations are conducted by a separate company (Company B). Person A owns 50% of the shares in Company B. Person A is over 55 years of age and wants to transfer the property owned by Company A to their descendants. It is Person A’s intention to hand over the management of all the farming and grazing activities to their descendants, effective from the date that the property is transferred. The transfer of the property will allow Person A to cease their farming and grazing activities and take up retirement. The taxpayers’ turnover (including affiliates and connected entities) is less than $2million.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | 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 152-40 | Income Tax Assessment Act 1997 section 152-125 | Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 subsection 152-70(1) | Income Tax Assessment Act 1997 subsection 152-105 | Income Tax Assessment Act 1997 section 152-110

Reasons for decision: Summary: Small business relief To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the ‘basic conditions’. The basic conditions are contained in Subdivision 152‑A of the ITAA 1997. Basic conditions A capital gain that you make may be reduced or disregarded under Division 152 of the 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 results in a gain ● the CGT asset satisfied the active asset test in section 152-35 of the ITAA 1997, and ● at least one of the following applies: ● you are a CGT 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 (section 152-10 of the ITAA 1997). Subsection 152-10(2) of the ITAA 1997 provides that if the CGT asset is a share in a company, one of these additional basic conditions must be satisfied just before the CGT event: (a) you are a CGT concession stakeholder in the company, or (b) CGT concession stakeholders in the company together have a small business participation percentage in you of at least 90%. Active asset test A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is ‘connected with’ you, in the course of carrying on a business. A CGT asset satisfies the active asset test if: (a) you have owned the asset for 15 years or less and the asset was an active asset of your for a total of at least half of the test period, or (b) you have owned the asset for more than 15 years and the asset was an active asset of your for a total of at least 7½ years during the test period (subsection 152-35 of the ITAA 1997). Subsection 152-40(3) of the ITAA 1997 provides that a share in a company that is an Australian resident can also be an active asset. This is provided that the total of: ● the market values of the active assets of the company; and ● the market value of any financial instruments of the company that are inherently connected with a business that the company carries on; and ● any cash of the company that is inherently connected with such a business; is 80% or more of the market value of all of the assets of the company. CGT small business entity You will be a small business entity for the purposes of the small business concessions if you are an individual, partnership, company or trust that: ● is carrying on a business, and ● has an aggregated turnover of less than $2million. CGT concession stakeholder An individual is a CGT concession stakeholder of a company or trust at a time if the individual is a significant individual in the company or trust, or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero. An individual is a significant individual in a company or trust if the individual has 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. Subsection 152-70(1) of the ITAA 1997 explains that an entity's direct small business participation percentage in a company is the percentage of: ● voting power that the entity is entitled to exercise (except for jointly owned shares) or ● any dividend payment that the entity is entitled to receive, or ● any capital distribution that the entity is entitled to receive, or ● if they are different, the smallest of the three percentages above. Small business 15-year exemption Subsection 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if all of the following conditions are satisfied: (a) you satisfy the basic conditions (b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event (c) you are either: i. 55 or over at the time of the CGT event and the event happens in connection with your retirement; or ii. permanently incapacitated at the time of the CGT event. Section 152-110 of the ITAA 1997 addresses the 15-year exemption as it applies to companies and trusts. Under this section, the entity can disregard any capital gain arising from the disposal of an asset if all of the following conditions are satisfied: (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 for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset; and (d) an individual who was a significant individual of the entity just before the CGT event was either: (i) at least 55 years old at that time and the event happened in connection with their retirement, or (ii) permanently incapacitated at that time. Distributions of the exempt amount Section 152-125 of the ITAA 1997 provides that, if a capital gain made by a company is disregarded under the small business 15-year exemption, or would have been except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985, any distribution 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, and not deductible to the company, if the following conditions are satisfied: ● the company makes a payment within two years after the CGT event that resulted in the capital gain or, in appropriate circumstances, such further time as allowed by the Commissioner ● the payment is made to an individual who was a CGT concession stakeholder of the company just before the CGT event, and ● the total payments made to each CGT concession stakeholder does not exceed an amount determined by multiplying the CGT concession stakeholders control percentage by the exempt amount. CGT event A1 – Disposal of a CGT asset CGT event A1 happens if an entity disposes of a CGT asset (subsection 104-10(1) of the ITAA 1997), such as when an asset is transferred from one entity to another by way of sale or gift. If the asset is disposed of under a contract, CGT event A1 happens when the contract is entered into, or if there is no contract, when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997). If an asset is acquired as a result of CGT event A1 happening the asset is acquired when the disposal contract is entered into or, if none, when the disposing entity stops being the asset’s owner (subsection 109-5(2) of the ITAA 1997). A capital gain you make is disregarded if you acquired the asset before 20 September 1985 (paragraph 104-10(5)(a) of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: Question 1 In this case: ● Person A will satisfy the basic conditions ● Person A will have owned the shares in Company A for over 15 years ● Person A will be over 55 at the time of the disposal ● the disposal of the shares will happen in connection with Person A’s retirement, and ● the active assets, financial instruments and cash of the company will be more than 80% of the market value of all the assets in the company. Accordingly, Person A satisfies all the conditions necessary to be eligible for the small business 15-year exemption concession on the disposal of the post-CGT shares in Company A. The capital gain made on the disposal of the shares can be disregarded. Questions 2&3 In this case, as the property is a pre-CGT asset, that is, it was acquired before 20 September 1985, any capital gain Company A makes from the transfer/disposal of the property will be disregarded under paragraph 104-10(5)(a) of the ITAA 1997. However, if the property was not a pre-CGT asset, Company A would qualify for the small business 15-year exemption because: ● Company A would satisfy the basic conditions ● Company A will have owned the property for over 15 years ● Company A will have had a significant individual for a total of at least 15 years during which it has owned the property ● Company A will have had a significant individual who will be over 55 just before the disposal of the property, and ● the disposal of the property will happen in connection with their retirement. As such, provided the payment of the exempt amount is made to Person A within two years of the CGT event and it does not exceed an amount determined by multiplying his control percentage by the exempt amount the payment will not be included in his assessable income.