Private ruling: Capital Gains Tax
Date of advice: 22 January 2016
Published: March 2016
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will a capital gains tax event happen to you when you sell your client list? | A1: Yes. | Q2: Are you eligible for the 15 year exemption in relation to the disposal of your client list? | A2: Yes. Issue 2 CGT related payments and the CGT cap election | Q3: Will a contribution covered under section 292-100 (certain CGT-related payments), to the extent that it does not exceed your CGT cap amount when it is made, be excluded from being counted as non-concessional contributions for a financial year under section 292-90 of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are: • the application for private ruling, and • the documents attached to the private ruling application. You are a service provider which started around XXXX as a sole trader. You have built a client list which you are now selling due to disability. You started the company in XXXX which you own 100%. You were employed by the company. There was no sale or transfer of the client list to the company. You have not previously contributed towards your superannuation capital gains tax cap. You have been forced to permanently retire from your occupation due to illness and do not have other employment (based on education, training or experience). You satisfy the maximum net asset value test.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 subdivision 152-C | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-10(1) | Income Tax Assessment Act 1997 section 152-105 | Income Tax Assessment Act 1997 subsection 152-40(1) | Income Tax Assessment Act 1997 section 292-90 | Income Tax Assessment Act 1997 paragraph 292-90(2)(c) | Income Tax Assessment Act 1997 section 292-100

Reasons for decision: Detailed Reasoning - Question 1: As per section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) you make a capital or capital loss if and only if a CGT event happens. Section 104-10 of the ITAA 1997 states a CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. In this case, as the client list was never transferred to the company it remains to be your asset and any CGT event that occurs will happen to you. Therefore, when you enter into a contract to sell the client list CGT event A1 will occur. | Detailed Reasoning - Question 2: In order to be eligible for the small business CGT concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997: (a) a CGT event happens in relation to an asset that the taxpayer owns (b) the event would otherwise have resulted in a capital gain (c) one or more of the following applies (i) the taxpayer satisfies the maximum net asset value test (ii) the taxpayer is a "small business entity" for the income year (iii) the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or (iv) the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year, and (d) the asset satisfies the active asset test. In this case a CGT event will occur when the client list is sold. The CGT event will result in a capital gain as the capital proceeds are expected to exceed the cost base of the asset. Additionally, you satisfy the maximum net asset value test. | Detailed Reasoning - Active asset test: The active asset test is contained in section 152-35 of the ITAA 1997. Subsection 152-40(1) of the ITAA states a CGT asset is an active asset at a time if, at that time: (a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership by: (i) you; or (ii) your affiliate; or (iii) another entity that is connected with your or; (b) If the asset is an intangible - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you. In this case, the client list is owned by you and it was used in the course of carrying on a business, first in your sole trader business and then in the company, therefore it is considered to be an active asset. The active asset test is satisfied if: • 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 detailed below, or • you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period. The test period: • begins when you acquired the asset, and • ends at the earlier of • the CGT event, and • when the business ceased, if the business in question ceased in the 12 months before the CGT event (under subparagraph 152-35(2)(b)(ii) of the ITAA 1997 the Commissioner can allow a longer period than 12 months). The client list was an active asset for more than 7.5 years. Accordingly, the active asset test contained in section 152-35 of the ITAA 1997 is satisfied. Therefore, provided the CGT event results in a gain, the basic conditions in 152-10(1) of the ITAA 1997 will be satisfied. | Detailed Reasoning - 15 year exemption: Section 152-105 of the ITAA 1997 provides a small business 15 year exemption for individuals. Under this section, an individual can disregard the capital gain from the disposal of a CGT asset if: (a) the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain; (b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event; (c) if the CGT asset is a share in a company or interest in a trust- the company or trust had a significant individual for a total of at least 15 years during which you owned the CGT asset; (d) either: - You are 55 or over at that time and the event happens in connection with your retirement; or - You are permanently incapacitated at that time of the CGT event. Having regards to your circumstances we accept that you satisfy the above conditions and therefore can disregard any capital gain made on the sale of the client list. | Detailed Reasoning - Non-concessional contributions: Non-concessional contributions are defined in section 292-90 of the ITAA 1997 and include certain contributions and amounts that are not included in the assessable income of a complying superannuation fund. Generally, non-concessional contributions include personal contributions for which an income tax deduction is not claimed, spouse contributions and excess concessional contributions. | Detailed Reasoning - Contributions excluded from being non-concessional contributions: Under paragraph 292-90(2)(c) of the ITAA 1997 certain contributions are excluded from being non-concessional contributions, including a contribution covered under section 292-100, being a contribution arising from certain CGT related payments to the extent that it does not exceed the CGT cap amount when it is made. As you are eligible for the 15 year exemption in relation to the disposal of a small business asset, you have the option of contributing all or some of the proceeds from the sale of the asset to a complying superannuation fund. The contribution of the sale proceeds will not be treated as a non-concessional contribution if certain conditions are met and the contribution does not exceed your CGT cap amount for the relevant financial year. In accordance with section 292-105 of the ITAA 1997, the CGT cap amount is a lifetime limit which is indexed annually. The CGT cap amount for the 2015-16 financial year is $1,395,000. The CGT cap amount is reduced by the amount of each contribution that a person has elected to be covered by the exemption from the non-concessional contributions cap. To qualify for the CGT concession under section 292-100 of the ITAA 1997 certain conditions must be met. In your case, these are: • the contribution is made to a complying superannuation plan in respect of you in the relevant financial year; and • the contribution is made on or before the later of the following days: (i) the day you are required to lodge your income tax return for the income year in which the CGT event happened; (ii) 30 days after the day you receive the capital proceeds; and • you provide the superannuation fund with a fully completed and signed Capital gains tax cap election form before, or at the time of, making the contribution. If the form is not provided the contribution will be treated as a non-concessional contribution and counted against the non-concessional contributions cap. Please be aware that an election made after the time the contribution it refers to is made, is not valid and contributions it covers will not be excluded from non-concessional contributions for the relevant financial year. Consequently, they will count towards your non-concessional contributions cap for the year. Furthermore, a contribution of the proceeds from the sale that exceeds the CGT cap amount for the relevant financial year will count towards your non-concessional contributions cap for the year.