Private ruling: Small business retirement exemption
Date of advice: 8 June 2017
Published: November 2017
Ruling period: Year ended 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2015

Ruling: Q1: Can you apply the small business retirement exemption to disregard the capital gain you made on the disposal of your shares in Company A? | A1: Yes.

Relevant facts and circumstances: Company A is a small business entity. You were a CGT concession stakeholder in Company A. You agreed to dispose of your shares in Company A. Under the agreement you were (are) to receive capital proceeds in the years ending 30 June 2017 and 2018. The total of: ● the market values of the active assets of Company A ● the market value of any financial instruments of Company A that are inherently connected with the business that it carries on, and ● any cash of Company A that is inherently connected with that business, has been 80% or more of the market value of all of the assets of the company throughout your ownership period. You satisfy the maximum net asset value test (MNAVT). You have not previously disregarded any capital gains under the small business retirement exemption. You will keep a written record of the amount you choose to disregard under the small business retirement exemption if you are allowed to apply it to the capital gain made on the disposal of your shares in Company A. You are over 55 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 paragraph 152-10(2)(a) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 subsection 152-35(2) | Income Tax Assessment Act 1997 subsection 152-40(3) | Income Tax Assessment Act 1997 subsection 152-40(3A) | Income Tax Assessment Act 1997 subsection 152-40(3B) | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 section 152-65 | Income Tax Assessment Act 1997 subsection 152-70(1) | Income Tax Assessment Act 1997 section 152-75 | Income Tax Assessment Act 1997 section 152-305 | Income Tax Assessment Act 1997 subsection 152-315(4)

Reasons for decision: Detailed Reasoning - Small business retirement exemption: The rules covering the small business retirement exemption are contained in Subdivision 152-D of the ITAA 1997. As you are over 55 and an individual, you can choose to disregard all or part of a capital gain if: ● you satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 (subsection 152-305(1) of the ITAA 1997), and ● you keep a written record of the amount you choose to disregard (subsection 152-315(4) of the ITAA 1997. The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit. An individual’s lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has previously disregarded under the retirement exemption (subsection 152-320(1) of the ITAA 1997). Basic conditions The basic conditions (as they are relevant in your case) that must be satisfied are: ● a CGT event happened in relation to your shares in Company A ● the event resulted in a gain ● you satisfy the MNAVT, and ● the shares satisfy the active asset test in section 152-35 of the ITAA 1997. Additional basic condition (as relevant in this case) for shares in a company As you are an individual and the relevant CGT assets are your shares in Company A, you must have been a CGT concession stakeholder in Company A just before the CGT event (paragraph 152-10(2)(a) of the ITAA 1997). Active Asset test A CGT asset will satisfy the active asset test if 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 ½ years during the test period (subsection 152-35(1) of the ITAA 1997). The test period begins when you acquired the asset and ends at the time of the CGT event (subsection 152-35(2) of the ITAA 1997). A share in a company that is an Australian resident is an active asset at a given time if, at that time, the total of: ● the market values of the active assets of the company ● the market value of any financial instruments of the company that are inherently connected with a business that the company carries on, and ● any cash of the company that is inherently connected with such a business, is 80% or more of the market value of all of the assets of the company (subsection 152-40(3) of the ITAA 1997). The 80% test does not need to be applied on a day to day basis. If a share was an active asset at an earlier point in time and it is reasonable to conclude that the share is still an active asset at a later time the share will still be considered an active asset (subsection 152-40(3A) of the ITAA 1997). In addition, the 80% test is taken to have been met where breaches of the 80% threshold are only temporary in nature (subsection 152-40(3B) of the ITAA 1997). CGT concession stakeholder An individual is a CGT concession stakeholder of a company if they are a significant individual in the company, or the spouse of a significant individual, if the spouse has a small business participation percentage in the company at that time that is greater than zero (section 152-60 of the ITAA 1997). Significant individual An individual is a significant individual in a company if they have a small business participation percentage in the company of at least 20% (section 152-55 of the ITAA 1997). This 20% can be made up of direct and indirect percentages. Small business participation percentage 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 (section 152-65 of the ITAA 1997). 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 smaller or smallest (subsection 152-70(1) of the ITAA 1997). An entity’s indirect small business participation percentage in a company is calculated by multiplying together the entity’s direct participation percentage in an interposed entity, and the interposed entity’s total participation percentage (both direct and indirect) in the company (section 152-75 of the ITAA 1997). | Detailed Reasoning - Application to your circumstances: In your case CGT event A1 happened to your shares in Company A when you agreed to dispose of them, which resulted in a capital gain. You satisfy the MNAVT and the shares satisfy the active asset test. You were a CGT concession stakeholder in Company A just prior to the CGT event. Therefore, you satisfied the basic conditions in relation to the shares you held in Company A. Provided you keep a written record of the amount you choose to disregard you are entitled to apply the retirement exemption in subsection 152-305(1) of the ITAA 1997 to the capital gain arising from the sale of the shares | Detailed Reasoning - Question 2: Can you choose, in accordance with section 292-100 of the Income Tax Assessment Act 1997 (ITAA 1997), to exclude a proposed contribution from your non-concessional contributions for the income year ending 30 June 2017? | Detailed Reasoning - Advice: No. | Detailed Reasoning - Question 3: Can you choose, in accordance with section 292-100 of the ITAA 1997, to exclude a proposed contribution from your non-concessional contributions for the income year ending 30 June 2018? | Detailed Reasoning - Advice: Yes. | Detailed Reasoning - This ruling and advice applies for the following period: Year ended 30 June 2016 Year ending 30 June 2017 Year ending 30 June 2018 | Detailed Reasoning - The arrangement commences on: 1 July 2015 Relevant facts and circumstances Company A is a small business entity. You were a CGT concession stakeholder in Company A. You agreed to dispose of your shares in Company A. Under the agreement you were (are) to receive capital proceeds in the years ending 30 June 2017 and 2018. The total of: ● the market values of the active assets of Company A ● the market value of any financial instruments of Company A that are inherently connected with the business that it carries on, and ● any cash of Company A that is inherently connected with that business, has been 80% or more of the market value of all of the assets of the company throughout your ownership period. You satisfy the maximum net asset value test (MNAVT). You have not previously disregarded any capital gains under the small business retirement exemption. You will keep a written record of the amount you choose to disregard under the small business retirement exemption if you are allowed to apply it to the capital gain made on the disposal of your shares in Company A. You are over 55 years of age. | Detailed Reasoning - Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-305 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 Income Tax Assessment Act 1997 subsection 292-100(7) Income Tax Assessment Act 1997 section 292-105 | Detailed Reasoning - Reasons for decision: Under paragraph 292-90(2)(c) of the ITAA 1997 a contribution is excluded from being a non-concessional contribution, if the contribution is covered under section 292-100 to the extent that it does not exceed the CGT cap amount when it is made. As you are eligible for the small business retirement 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. For a contribution to be covered under section 292-100 of the ITAA 1997 the following conditions must be satisfied: (a) you must make the contribution to a complying superannuation plan in respect of yourself; (b) the contribution must be equal to all or part of the capital gain that you disregarded under subsection 152-305(1) of the ITAA 1997; (c) the contribution must be 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 (d) you make the choice in the approved form and you give the form to your superannuation fund before, or at the time of, making the contribution. In your case, the CGT event happened in the income year ended 30 June 2016 and your income tax return for that year was required to be lodged by 31 October 2016. You received two instalments of the capital proceeds from the sale of the shares during the year ending 30 June 2017. Thirty days after these dates is before 31 October 2016. Therefore, in respect of the capital proceeds you have already received, you would have needed to make a contribution by 31 October 2016. As you didn’t make the contribution by 31 October 2016, you cannot choose to exclude a proposed contribution under section 292-100 from your non-concessional contributions for the income year ending 30 June 2017. You will also receive further proceeds from the sale of the shares during the year ending 30 June 2018. If you make a contribution within 30 days after you receive these capital proceeds and satisfy the other conditions set out in (a) to (d) above, it will be covered by section 292-100. To the extent that the contribution does not exceed your CGT cap amount ($1,445,000 in the income year ending 30 June 2018) it will not be a non-concessional contribution. The contribution can be equal to all of, or part of, the capital proceeds you receive during the year ending 30 June 2018.