Private ruling: CGT – small business concessions – 15 year exemption
Date of advice: 13 June 2018
Published: August 2018
Ruling period: Year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Do you satisfy the basic conditions for the small business capital gains tax (CGT) concessions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Are you eligible to apply the small business CGT 15 year exemption concession to the gain from the sale of your business? | A2: Yes.

Relevant facts and circumstances: You were over 55 years of age when you sold your business and retired. The sale of your business included the transfer of your clients to the buyer, the goodwill of your business and all assets relating to its operation: tables, chairs, stools, worksheet shelves, room divider, stationery, digital clocks, answer books, solution books etc. Your business turnover was under $X. The total net value of the asset was under $X . You had been a franchisee in this business for over 20 years. You signed an initial franchise agreement 20 years ago. Clause 3 of this agreement states: Duration of Licence Agreement This agreement shall have effect for a period of two years (“the Initial Period”) from the date hereof although it shall be automatically renewed upon the same terms and conditions herein (including this clause 3), without limit in time, for further consecutive periods each of two years (“the Renewal Periods”), the first of which shall commence on the day following the expiry of the Initial Period, subject: (a) Always to the Company’s right to terminate as set out in clause 12A hereof; (b) Always to the Licensee’s right to terminate as set out in clause 12B hereof. You subsequently signed a new franchise agreement. Clauses 7 and 8 state: 7. Term This Agreement shall commence on the Commencement Date and shall continue for the Term specified in Item 3 of the Reference Schedule and any further period as agreed in writing pursuant to Clause 8 below between the parties, unless terminated in accordance with this Agreement. 8. Extension A. (i) Within 6 months but not less than 2 months before the expiration of the Term, the Franchisee shall notify the Franchisor in writing of its desire to extend the Agreement for the period specified in Item 3A of the Reference Schedule. (ii) The Franchisor shall not unreasonably withhold its consent to a request for an extension of the Agreement for the further term specified in Item 3A of the Reference Schedule on the same terms and conditions of this Agreement (except that this Clause shall not apply and that after the extension, this Agreement terminates at the expiration of the further term specified in Item 3A of the Reference Schedule) where the Franchisor is satisfied that the Franchisee has met the conditions set out in sub-clause B below. The Franchisee is not required to pay the initial franchise fee at the time of extension. (iii) Upon termination of this Agreement following the extension thereof, if the Franchisee wishes to continue the Franchised Business, the Franchisee must enter into a new franchise agreement with the Franchisor on such terms and conditions agreed by the parties. The Franchisor, upon entering into the new franchise agreement, at its absolute discretion, may release the Franchisee from paying the initial franchise fee. (iii) [sic] In the event of the Franchisee continuing to operate the Franchised Business at the expiration of the Term or any further term with the approval or acquiescence of the Franchisor, such continuation shall be strictly on a month to month basis capable of being terminated by either party giving to the other one month prior notice and under the terms and conditions of this Agreement. You signed a further franchise agreement. Clauses 7 and 8 state: 7. TERM This Agreement shall commence on the Commencement Date and shall continue for the Term specified in Item 3 of the Reference Schedule and any further period as agreed in writing pursuant to Clause 8 below between the parties, unless terminated in accordance with this Agreement. 8. EXTENSION A. Upon Expiry of Initial Term (i) The Franchisor shall notify the Franchisee in writing not less than 6 months before the expiration of the Term specified in Item 3A of the Reference Schedule of its intention to offer a new Agreement to the Franchisee following expiry of the Further Term. (ii) The Franchisee is not required to pay the initial franchise fee at the time of extension. B. Upon Expiry of Further Term (i) The Franchisor shall notify the Franchisee in writing not less than 6 months before the expiration of the Further Term specified in item 3A of the Reference Schedule of its intention to offer a new Agreement to the Franchisee following expiry of the Further Term. (ii) This Agreement shall terminate at the expiration of the Further Term specified in Item 3A of the Reference Schedule. C. (i) Should the Term or any Further Term specified in Item 3A of the Reference Schedule be for a period of 6 months or less, the notice periods referred to in clauses 8A (i) and 8B (i) shall be not less than one month before the expiration of the term of its intention to offer a further term or a new agreement. Otherwise, those provisions shall remain the same. (ii) The Franchisor, upon entering into a new franchise agreement with the Franchisee, at its absolute discretion, may release the Franchisee from paying the initial franchise fee. (iii) In the event that an extension or new Agreement is not entered into at the expiration of the Term or any Further Term the Franchisor may, at its sole discretion, allow the Franchisee to operate the Franchised business for a period of no more than 3 months under the same terms and conditions of this Agreement. You were trading under the same ABN for the whole period. You were the sole trader of the business for the entire period. You had operated the business at different locations in the same state of Australia over the 20 year period. You leased community or church halls. You operated only one location at any one time and there was no gap between the relocation of the business. You registered different business names to reflect the change in physical location. You brought whichever clients were willing to relocate with you to the new location each time you moved. You have not claimed any CGT retirement exemptions before.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152

Reasons for decision: Summary: You are entitled to disregard any capital gain made on the disposal of your business under the small business 15-year exemption concession. | 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. A capital gain that you make may be reduced or disregarded under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) 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 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; (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 (1A) or (1B) are satisfied in relation to the CGT asset in the income year; (d) the CGT asset satisfies the active asset test (see below). | Detailed Reasoning - Active asset test: This test requires the CGT asset to be an active asset for: ● 7 years, if owned for more than 15 years, or ● half of the ownership period if owned for 15 years or less. A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliates, your spouse or child or an entity connected with you. For 20 years you operated your business under the same ABN. The initial franchise agreement you signed provided for automatic extensions of periods of a further two years. The subsequent franchise agreements you signed included provision for renewals up to a maximum of four years. You continued to operate your business uninterrupted throughout each of the renewed franchise agreements. You have satisfied the basic conditions contained in Subdivision 152-A of the ITAA because: ● a CGT event occurred when you sold your business ● the event resulted in a gain ● you ran your business continually for over 20 years, and ● the CGT asset satisfies the active asset test. | Detailed Reasoning - 15 year exemption: To qualify for the 15 year exemption, the basic conditions must be satisfied and the CGT asset must have been continuously owned for the 15 year period ending just before the CGT event happened. You satisfy both the basic conditions and the active asset test. You were over the age of 55 immediately before the CGT event occurred and you operated your business continually for over 15 years prior to the CGT event occurring. Therefore the conditions for the 15 year exemption are satisfied.