Private ruling: small business capital gains tax concessions
Published: November 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Do you satisfy the basic conditions for the small business capital gains tax concessions? | A1: Yes. | Q2: Can you apply the retirement exemption to the capital gain made on the sale of the property? | A2: Yes.

Relevant facts and circumstances: The company purchased a property after 20 September 1985. The property was used to operate a business for more than 7½ years. For a period of time, it was rented to an unrelated entity. The shareholders of the company are individual A and B. They each hold more than 20% of the shares in the company and have always done so. The company satisfies the maximum net asset value test. Individual A and B are over 55 years of ago. Individual A and B have not previously disregarded a capital gain under the retirement exemption. The company intends to sell the property during the 2013-14 financial year and make a capital gain.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152-C | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 Subdivision 152-D

Reasons for decision: Detailed Reasoning - Basic conditions: 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. Division 152-C of the ITAA 1997 applies the small business 50% active asset reduction provided the basic conditions are satisfied. 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 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. | Detailed Reasoning - Active asset test: A CGT asset will satisfy the active asset test if: (a) you have owned the asset for 15 years or less and the asset was an active asset of yours 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 yours for a total of at least 7½ years during the test period. The test period begins when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business. Subsection 152-40(1) details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you. | Detailed Reasoning - Application to your circumstances: In this case, the company plans to sell the property which will result in a capital gain. The property was purchased by the company after 20 September 1985 and has been owned for more than 15 years. The company used the property in the course of carrying on a business for more than 7½ years. Therefore, the property will satisfy the active asset test. As the company also satisfies the maximum net asset value test, the basic conditions for the small business CGT concessions have been met. Therefore, the company can apply the small business 50% active asset reduction to the capital gain from the sale of the property. | Detailed Reasoning - Retirement exemption: The rules covering the small business retirement exemption are contained in Subdivision 152-D of the ITAA 1997. An entity may choose to disregard all or part of a capital gain under the retirement exemption if certain conditions are satisfied. If the entity is a company or trust, they can choose to disregard all or part of a capital gain where all of the following conditions are met: · the company satisfies the basic conditions · the company satisfies the significant individual test · a written record of the amount disregarded is kept and if there are more than one CGT concession stakeholders, each stakeholder's percent of the exempt amount (one may be nil, but together they must add up to 100%) · a payment is made to at least one of the 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 the capital proceeds are received in instalments, a payment is made to a CGT concession stakeholder for each instalment in succession. 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 retirement savings account on their behalf. The amount of the capital gain the company disregards cannot exceed 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. Significant individual test An individual is a significant individual of a company if they have a small business participation percentage in the company of at least 20%. This 20% can be made up of direct and indirect percentages. A company will satisfy the significant individual test if it had at least one significant individual just before the CGT event. An entity's small business participation percentage in another entity at a time is the percentage that is the sum of: · the entity's direct small business participation percentage in the other entity at that time, and · the entity's indirect small business participation percentage in the other entity at that time. An entity's direct small business participation percentage in a company is the percentage of: · voting power that the entity is entitled to exercise · 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. The participation percentage can be held directly or indirectly through one or more interposed entities. | Detailed Reasoning - CGT concession stakeholder: An individual is a CGT concession stakeholder of a company if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company at that time that is greater than zero. The percentages are worked out in the same way as for the significant individual test. | Detailed Reasoning - Application to your circumstances: In this case, the company satisfies the basic conditions. To be eligible to apply the retirement exemption, the company must also satisfy the significant individual test. This test requires the company to have had at least one significant individual just before the CGT event. Both individual A and B held more than 20% of the shares in the company. Individual A and B have a small business participation percentage in the company of more than 20%. Therefore, individual A and B are significant individuals of the company. They are also CGT concession stakeholders in the company. Therefore, the company is entitled to apply the retirement exemption to the capital gain made on the sale of the active assets.