Private ruling: Small business concessions
Date of advice: 10 July 2018
Published: September 2018
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Can you apply the small business 15-year exemption to disregard the capital gain you make on the disposal of the property? | A1: Yes. | Q2: Can you make a distribution of the disregarded capital gain to the relevant estate that is exempt from tax under section 152-125 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes. | Q3: Can you make a distribution of the disregarded capital gain to the new shareholders of the company that is exempt from tax under section 152-125 of the ITAA 1997? | A3: No.

Relevant facts and circumstances: You (the company) owned a parcel of land and operated a business on the land until recently. The company, its connected entities and affiliates have a turnover of less than $2million. The property was an active asset for at least 7.5 years. The company entered into a contract to sell the property. The sole shareholder of the company was involved with the business up until the sale of the property and would have fully retired once the property was sold. The sole shareholder was over 55 years of age. The sole shareholder passed away between contract date and settlement date.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-110 | Income Tax Assessment Act 1997 section 152-125 | Taxation Administration Act 1953 section 260-140

Reasons for decision: Summary: Small business CGT concession basic conditions Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset 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 in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when your ownership in a CGT asset (eg. land or buildings) is transferred to another entity. Section 152-40 of the ITAA 1997 provides the meaning of ‘active asset’. 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. Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test 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 period of ownership, or ● 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 7 and a half years. Small business 15-year exemption Under section 152-110 of the ITAA 1997 a company can disregard the capital gain made on the disposal of a CGT asset if the company: (a) satisfies the basic conditions for the small business CGT concessions in Subdivision 152-A of the ITAA 1997 for the gain (b) continuously owned the CGT asset for the 15-year period ending just before the CGT event (c) had a significant individual for a total of at least 15 years (even if it was not the same significant individual during the whole period) during which the company owned the CGT asset, and (d) an individual who was a significant individual of the company just before the CGT event either: (i) was 55 or over at that time and the event happens in connection with the individual’s retirement, or (ii) was permanently incapacitated at that time. Under section 152-55 of the ITAA 1997 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. In your case, the basic conditions contained in Subdivision 152-A of the ITAA 1997 will be satisfied because: ● a CGT event occurred when you disposed of the property ● the event resulted in a gain ● you were carrying on a business and had an aggregated turnover of less than $2million, and ● you have owned the property for more than 15 years and it has been used in a business carried on by you for a total of at least 7½ years of your ownership period. In addition, ● you have continuously owned the property for the 15-year period ending just before the CGT event ● you have had a significant individual for a total of at least 15 years during which you have owned the property, and ● The sole shareholder, who was a significant individual of you just before you disposed of the property, was over 55 at that time and the disposal of the property was in connection with their retirement. Therefore, you qualify for the small business 15-year exemption in section 152-110 of the ITAA 1997 in relation to the farm land. You can disregard the capital gain you make on its disposal. 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, 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. Section 152-60 of the ITAA 1997 defines an individual as 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. ATO ID 2012/39 discusses the Commissioner’s view of the role of the executor in the context of the small business concessions. It notes that Taxation Ruling IT 2622 explains that an executor, in effect, steps into the shoes of the deceased’s personal affairs. Additionally section 260-140 of the Taxation Administration Act 1953 allows the Commissioner in some circumstances to treat the executor of a deceased estate as if the trustee was the deceased person and the deceased person was still alive. In your case, the sole shareholder was the only CGT concession stakeholder when the property was sold. However, as they had passed away before the sale was completed a distribution of the exempt amount could not be made to them. The executor of the deceased’s estate will be able to stand in their shoes and can be treated as if they were the deceased. Consequently, provided the payment is made within two years of the CGT event, a payment of the exempt amount can be made to the estate of the deceased to satisfy the requirements of section 152-125 of the ITAA 1997 and the payment will not be included in the assessable income of the estate. As the sole shareholder was the only CGT concession stakeholder at the time the property was sold a distribution of the exempt amount, which satisfies the requirements of 152-125 of the ITAA 1997, cannot be made to any other entity, including the new shareholders of the company.