Private ruling: Capital gains tax - small business concessions
Date of advice: 23 November 2017
Published: April 2018
Ruling period: Year ending 30 June 2018. | Year ending 30 June 2019.
Date scheme commenced: 1995.

Ruling: Q1: Do you satisfy the basic conditions in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the sale of the self-storage business and property from which is it conducted? | A1: Yes. | Q2: Are you eligible to apply the 15 year exemption in Subdivision 152-B of the ITAA 1997 in relation to the sale of the self-storage business and property from which is it conducted? | A2: Yes. | Q3: Will payments of the CGT exempt amounts directly to the CGT concession stakeholder(s) be considered assessable income of any kind? | A3: No.

Relevant facts and circumstances: The Company was formed in the 1960s (Company Z). Company Z acquired several adjoining lots of post-CGT land (the property). Company Z constructed a self-storage facility over a number of stages with the first stage completed more than 15 years ago. Company Z operates a self-storage business (the business). The facility currently has 100s of self-storage units of varying sizes that are available for hire to the general public. The complex has key pad security for when a customer enters and exits, while each storage unit has its own individual padlock. The average length of a hire term is between 6 to 12 months. When hiring out a unit, you enter into an industry standard self-storage agreement (hire agreement). The hire agreement does not give exclusive possession of the unit and provides: ● Goods stored at the facility are stored at the risk of the hired who would be required to take out their own insurance; ● The unit will only be accessible by the customer in designated hours; ● The agreement can only be terminated with 7 days’ notice; ● Company Z can refuse access to the unit when there are outstanding fees owing; ● Company Z has the right to access the hired unit and in some instances relocate the goods stored to another unit; ● The hirer is not able to assign their rights under the hire agreement. The business has on-site management and an on-site manager that is on-site 24 hours a day for additional security. The on-site managers are contractors. The business has packing boxes, packing paper, butchers paper, mattress protectors and padlocks available for purchase by customers. The business provides trolleys at no charge and can assist in providing referrals in relation to removalists. Person B is sole director of Company Z and is a majority shareholder. Person B is currently over 55 years old. The business was managed by Person B and their spouse, Person A, until their death some years ago. On Person A’s passing, Person B acquired all of Person A’s shares in Company Z. Person B has been actively involved in the business, however has recently delegated more tasks to Person C due to their age and health. Prior to the accident Person B worked a specified number of hours per week, but has now reduced their average working hours. Company Z is considering disposing of the business and the property which it is operated from to an unrelated entity to allow Person B to retire. Following the sale, Person B will not perform any duties for the purchases and will completely cease work. Company Z does not carry on any other business, and is not connected to any other entity that carries on a business. The business has an aggregated turnover of less than $2 million. Shareholding in Company Z Historical shareholder: Shareholder Ordinary Shares “A” Class Shares Person A X% X% Person B X% X% TOTAL 100% X% Current shareholder: Shareholder Ordinary Shares “A” Class Shares Person B 100% X% Company Y - X% TOTAL 100% 100% Company Y does not undertake any other activity, other than hold X% of “A” Class Shares in Company Z. Company X as Trustee for a trust (the Trust), owns all shares in Company Y. Person B is the controller of the Trust. Company Y has previously never declared a dividend to the Trust. Under the constitution of Company Z, “A” Class Shares were the only shares with voting rights attached, however after Don’s passing both “A” Class Shares and Ordinary Shares have the same rights in relation to voting, dividends and capital. In this income year: ● Company Y has paid a dividend to the Trust; and ● Person B will be entitled to 100% of the income from the Trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10. | Income Tax Assessment Act 1997 Section 152-35. | Income Tax Assessment Act 1997 Section 152-40. | Income Tax Assessment Act 1997 Subsection 152-40(1). | Income Tax Assessment Act 1997 Paragraph 152-40(1)(a). | Income Tax Assessment Act 1997 Subsection 152-40(4). | Income Tax Assessment Act 1997 Paragraph 152-40(4)(e).

Reasons for decision: Summary: Company Z satisfies the basic conditions in relation to the sale of the business and the property from which the business is conducted. | Detailed Reasoning - Small business concessions: To qualify for the small business concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. The basic conditions in Subdivision 152-A of the ITAA 1997 which are relevant to you are: ● the small business entity test; and ● the active asset test. | Detailed Reasoning - Small business entity: You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover of less than $2 million. Company Z has an aggregated turnover of less than $2 million and is small business entity for the purposes of the small business concessions. | Detailed Reasoning - Active asset test: 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 at least 7.5 years during the test period. The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. 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 affiliate, your spouse or ● an intangible asset that is inherently connected with a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or another entity that is connected with you, carries on; for example, goodwill. Subsection 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset unless the main use for deriving rent was only temporary. Taxation Determination TD 2006/78 Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent? discusses the circumstances in which premises used in the business of providing accommodation for reward can be active assets notwithstanding the exclusion in paragraph 152-40(4)(e) of the ITAA 1997. Paragraphs 4-7 of Taxation Determination TD 2006/78 provide an example of a commercial storage business. The particular circumstances of Company Z are in line with this example which provides that where a tenant/landlord relationship does not exist between the parties (in that example) the amounts received are not considered rent and therefore the exclusion in paragraph 152-40(4)(e) of the ITAA 1997 does not apply. Application to your situation The hire agreement indicates that the users of the storage sheds do not have the right to exclusive possession but rather only the right to enter and use the facility for certain purposes. Company Z also provides additional services and has products available for purchase, as well an on-site office. The tenant/landlord relationship does not exist between the parties and therefore the amounts received are not rent. Furthermore, the active asset test is satisfied as Company Z has held the property for more than 15 years and it has been used in the business for a total of more than 7.5 years of the ownership period. Both the business and the property are considered active assets. | Summary: Company Z can apply the 15 year exemption in relation to the sale of the self-storage business and property. It is accepted that Person B is significant individual and the CGT event will occur “in connection” with their retirement. | Detailed Reasoning - Detailed reasoning: 15 year exemption Section 152-110 of the ITAA 1997 provides that a company or trust can disregard any capital gain made on the disposal of an asset if all of the following conditions are satisfied: (a) the basic conditions in Subdivision 152-A are satisfied for the gain; (b) the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event; (c) the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset; (d) an individual who was a significant individual of the company or trust just before the CGT event either: (i) was 55 or over at that time and the event happened in connection with the individual's retirement; or (ii) was permanently incapacitated at that time. Whether a CGT event happens in connection with an individual’s retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. Significant individual An individual can be a significant individual in a company either directly or indirectly through one or more interposed entities. An individual is a significant individual in a company if, at that time, the individual has a small business participation percentage in the company of at least 20% (section 152-55 of the ITAA 1997). An entity's small business participation percentage in another entity at a time 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, or any dividend payment that the entity is entitled to receive, or any capital distribution that the entity is entitled to receive (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). Application to your situation As already addressed, Company Z satisfies the basic conditions and has owned the business and the property from which the business is operated for more than 15 years. Based on the history of shareholders of Company Z, it is accepted that either Person A or Person B have been significant individuals for at least 15 years. Person B’s current small business participation (direct and indirect) for this income year is calculated at 100%; therefore Person B is currently a significant individual in Company Z. Furthermore, it is accepted that the CGT event will occur ‘in connection’ with Person B’s retirement. Person B is currently over 55 years old and has already reduced some of the hours worked in the business and the nature of the work they do, and upon sale of the business and the property will retire from the business. Therefore, as the conditions in section 152-110 will be satisfied, Company Z can apply the 15 year exemption. | Detailed Reasoning - Question 3: If a capital gain made by a company or trust is disregarded under the small business 15 year exemption, any distributions made by the company or trust 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 or trust if certain conditions are satisfied. The conditions are: ● the company or trust must make 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 must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event, and ● the total payments made to each CGT concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholder’s control percentage by the exempt amount. In this case Person B is CGT concession stakeholder with a small business participation percentage of 100%. Therefore the total capital gain disregarded by Company Z under the 15 year exemption is an exempt amount when directly paid to the CGT concession stakeholder within two years.