Private ruling: Small business capital gains tax concessions
Published: March 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Where you meet the relevant conditions, can you choose to apply the small business capital gains tax (CGT) concessions to a capital gain from CGT event A1, arising from the sale of a replacement asset? | A1: Yes. | Q2: Where you meet the relevant conditions, can you choose to apply the 50% active asset reduction to a capital gain from CGT event J2, arising from the sale of a replacement asset? | A2: No. | Q3: Where you meet the relevant conditions, can you choose to apply the retirement exemption to a capital gain from CGT event J2, arising from the sale of a replacement asset? | A3: Yes.

Relevant facts and circumstances: The company is a private company that was incorporated in the 2002-03 financial year. The company satisfies the basic conditions for the small business capital gains tax concessions. The company has a single shareholder. This shareholder is under 55 years of age. The company was incorporated to purchase a business from a third party. The company sold the business and made a capital gain. The company elected to rollover the capital gain made from the sale of the business. Within 2 years of the sale of the business the company purchased another business. In the 2011-12 financial year the company sold the business and made a capital gain. The company is now looking to acquire another business. A partnership will be set up to acquire this new business.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-185(1), | Income Tax Assessment Act 1997 Subdivision 152-D, and | Income Tax Assessment Act 1997 Subdivision 152-E.

Reasons for decision: Summary: The conditions surrounding the small business rollover concession are contained in Subdivision 152-E of the Income Tax Assessment Act 1997 (ITAA 1997). The small business rollover allows an entity to defer all or part of a capital gain made from a CGT event happening to an active asset. If an entity chooses the rollover concession, all or part of the capital gain will not be included in their assessable income until a change in circumstances happens (for example the replacement asset is sold). Under subsection 104-185(1) of the ITAA 1997, CGT event J2 happens if an entity chooses the rollover concession and a change in circumstances happens. When the change occurs, the deferred capital gain will crystallise. When an entity disposes of a replacement asset, CGT event A1 happens in addition to CGT event J2. Any capital gain made from the A1 event on the disposal of the replacement asset may qualify for any of the small business CGT concessions if the relevant conditions are satisfied. In this case, the company sold a business that had been purchased as a replacement asset. When this asset was sold, CGT event A1 occurred in addition to CGT event J2. The company can choose to apply the concessions to the capital gain from the A1 event if the relevant conditions are satisfied. As discussed above, CGT event J2 occurs when an entity's use of the replacement asset changes. The time of the event is when the change happens. A capital gain from CGT event J2 may qualify for further rollover (if you acquire another replacement asset) or the retirement exemption (provided the conditions specific to this concession are satisfied). An entity cannot apply the CGT discount, the 15 year exemption or the small business 50% active asset reduction to reduce a capital gain from a J2 event. In this case, the company sold a business that had been purchased as a replacement asset. CGT event J2 occurred when this asset was sold. Therefore, the company cannot apply the small business 50% active asset reduction to reduce the capital gain from the J2 event. A company can choose to disregard all or part of a capital gain under the retirement exemption in Subdivision 152-D of the ITAA 1997 if: · the basic conditions are satisfied · the significant individual test is satisfied · a written record is kept of the amount disregarded · a payment is made to at least one of the CGT concessions 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 the payment must be immediately paid to a complying superannuation fund on their behalf. The company must notify the trustee of the fund at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption. The company must make payments seven days after a choice to disregard the capital gain if they choose the retirement exemption for a J2 event. | Detailed Reasoning - CGT concession stakeholder: As per section 152-60 of the ITAA 1997 an individual is a CGT concession stakeholder of a company or trust 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 or trust at that time that is greater than zero. | Detailed Reasoning - Significant individual: An individual is a significant individual in a company or trust if they have 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. An entities direct small business participation percentage in a company is the percentage of: · voting power 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 small of the three definitions above. An entities indirect small business participation percentage in a company (or trust) is calculated by multiplying together an entity's direct participation percentage in an interposed entity and the interposed entity's total participation percentage (both direct and indirect) in the company or trust. | Detailed Reasoning - Application to your circumstances: As discussed in question 2, CGT event J2 occurred and the company made a capital gain. The company has satisfied the basic conditions for the small business concessions. The company's single shareholder is a CGT concession stakeholder and a significant individual of the company as they have a small business participation percentage of 100%. The company is eligible to choose the retirement exemption, provided the conditions associated with making the payment are satisfied.