Private ruling: Capital gains tax - small business concessions - basic conditions - choices
Date of advice: 18 May 2017
Published: September 2017
Ruling period: 1 July 2014 to 30 July 2017.
Date scheme commenced: 1 July 2014.

Ruling: Q1: Do you satisfy the basic conditions under Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will the Commissioner allow extra time for you to make a choice under section 103-25 of the ITAA 1997 to apply the small business capital gains tax concessions to the capital gain made on the sale of the property? | A2: Yes.

Relevant facts and circumstances: You were incorporated prior to 20 September 1985. Your directors and shareholders at the time of incorporation were Person A and Person B, who held an equal number of your ordinary shares. . After 20 September 1985, you entered into a contract to purchase a strata-titled property (the Property) with settlement occurring after a short period. In the income year you purchased the Property you commenced operating a business from the Property with Persons A and B conducting the business. A number of years later, Person A passed away and their share in you was transferred to Person B as the sole beneficiary of Person A's Estate. The business continued to be conducted by Person B who ceased those activities in the same income year that Person A had passed away when they became ill. Person C, Person A's child, took over conducting the business with the assistance of Person B. The major owner of the Property's strata title determined that the building in which it is located should be substantially renovated. The renovations commenced in the year after Person A had passed away and the business ceased trading. You received rent compensation from the major owner of the building during the construction and renovation for a number of years after the work had commenced. In the income year after the renovation work had commenced, Person B had ceased being your director. The renovation work on the Property was completed a number of years after it had commenced. From the time the renovation work was completed until the Property was sold, it was rented to unrelated tenants to derive rental income. A contract for the sale of the Property for $X,XXX,XXX was entered into a number of years after the renovation work had been completed.. You made a capital gain of $XXX,XXX on the sale of the Property. The net value of the capital gains tax assets held by you for the purposes of the maximum net asset value test is under six million dollars. Your tax agent lodged your assessment and had included the capital gain made on the disposal of the Property. Your tax agent has recently considered whether you were eligible to reduce the capital gain made on the sale of the Property by applying the small business CGT concessions. After discussing and researching the issue he has identified that you were entitled to reduce the capital gain by applying the small business CGT concessions to it.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 152 | Income Tax Assessment Act 1997 - Section 103-25

Reasons for decision: Detailed Reasoning - Small business capital gains tax concessions - Basic conditions: 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 sale of the Property resulted in a capital gain; ● the Property was used in relation to your business which was conducted by Persons A and B who were your shareholders and directors, for over ten years; ● the net value of the assets of you and your affiliates and connected entities was below $6million at the time the Property was sold; and ● you owned the Property for more than 15 years. | Detailed Reasoning - Extension of time to make a choice: It is stated in the ruling that due to incorrect advice being provided to you by your tax agent, the small business CGT concessions had not been considered in relation to the capital gain made on the sale of the Property. Accordingly, you had not made the choice to claim the small business CGT concessions when you had lodged your assessment and a net capital gain amount of $XXX,XXX was included in your assessment. It is accepted that the oversight by your tax agent meant that the small business concessions were not considered in relation to the capital gain resulting from the sale of the Property. As a result of this oversight, you effectively have not made a choice. We consider this to be an acceptable explanation for the period of extension required. There would be no prejudice to the Commissioner or unsettling of people by allowing the extension. There is no mischief involved. The Commissioner considers it fair and reasonable in these circumstances to exercise his discretion. Having regard to all the circumstances, it is considered reasonable for the Commissioner to allow the you further time under paragraph 103-25(1)(b) of the ITAA 1997 to make the choice to apply the small business CGT concessions to the capital gain made on the sale of the Property.