Private ruling: capital gains tax
Published: May 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will a capital gains tax (CGT) event occur when the business is sold? | A1: Yes. | Q2: Are you entitled to apply the small business 15 year exemption to the capital gain? | A2: Yes. | Q3: Are you entitled to apply the small business retirement exemption to the capital gain? | A3: Yes.

Relevant facts and circumstances: You and your spouse are partners in a partnership. The partnership commenced in the early 1990's and has been operating for more than 15 years. The partnership is a small business entity with a turnover of less than $2 million. The business produces and sells programs. Another entity has made an offer to purchase the rights to the programs along with the goodwill of the business. You are over 55 years of age and intend to cease working once the sale is complete. The proceeds from the sale will be used to fund your retirement.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 subsection 108-5(2) | Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 section 120-20 | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 Subdivision 152-D

Reasons for decision: Summary: Subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a CGT asset is: a) any kind of property; or b) a legal or equitable right that is not property. Subsection 108-5(2) of the ITAA 1997 defines a CGT asset to include goodwill. Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when your ownership in a CGT is transferred to another entity. The time of the event is when you enter into a contract for the disposal, or, if there is no contract, the time of disposal is taken to be the time when the change in ownership occurs (not when settlement or payment occurs). In this case, you intend to sell the business, including goodwill, to another entity. As a change in ownership will occur when the transaction takes place, a CGT event will happen. 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 ITAA 1997 if the following basic conditions are satisfied: • A CGT event happens in relation to a CGT asset of yours in an income year, • The event would have resulted in a gain, • The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and • At least one of the following applies; • you are a small business entity for the income year, • you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, • 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, or • you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you. Active asset test 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, or • an intangible asset that is inherently connected with a business carried on (whether alone or in partnership) by you, for example; goodwill. A capital gains tax (CGT) asset will satisfy the active asset test if: a) 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, or b) 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 7½ years during the test period. The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business. | Detailed Reasoning - Application to your circumstances: In this case, the partnership is a small business entity with a turnover of less than $2 million. As discussed above, a CGT event will occur when the business is sold. The sale of the business includes goodwill and the rights to the programs produced by the partnership. These assets are considered active and will satisfy the test outlined above. Therefore, you have satisfied the basic conditions for the small business concessions. 15 year exemption Subdivision 152-B of the ITAA 1997 provides a small business 15 year exemption as part of the capital gains tax (CGT) small business relief provisions. If you qualify for the small business 15 year exemption, the capital gain is entirely disregarded and it is unnecessary to apply any other concessions. If you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied: (a) the basic conditions are satisfied (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 an interest in a trust, the company or trust had a significant individual for a total of at least 15 years (d) either: (i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement, or (ii) you are permanently incapacitated at the time of the CGT event. | Detailed Reasoning - Application to your circumstances: As discussed above, the basic conditions have been satisfied. You have continuously owned the CGT assets since the business commenced operations in the early 1990's. You are over 55 years of age and intend to retire once the business is sold. As you have satisfied each of the conditions you are entitled to apply the 15 year exemption to the capital gain. | Detailed Reasoning - Question 3: Subdivision 152-D of the ITAA 1997 contains the small business retirement exemption. You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. If you are an individual, you can choose to disregard all or part of a capital gain if: • you satisfy the basic conditions • you keep a written record of the amount you choose to disregard (the exempt amount) If you are 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund. | Detailed Reasoning - Application to your circumstances: As discussed, you have satisfied the basic conditions for the small business concessions. As you are over 55 years of age, there is no requirement to pay any amount to a complying superannuation fund. Provided you keep a written record of the amount you choose to disregard, you are entitled to apply the retirement exemption.