Private ruling: Capital gains tax small business 15-year exemption and superannuation contributions
Published: September 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the capital gains tax (CGT) small business 15-year exemption in section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) apply in relation to the disposal of your shareholding? | A1: Yes. | Q2: Does the amount of the disregarded capital gain from the disposal of your shareholding need to be included in your income tax return even though it is not assessable income? | A2: No. | Q3: Will the proceeds from the disposal of your shareholding have to be contributed towards superannuation? | A3: No. | Q4: Will any amount you place into superannuation from the disposal of your shareholding be treated as a non-concessional contribution? | A4: Yes.

Relevant facts and circumstances: You hold one share out of a total of two shares in company X (the company) which is an Australian resident company. You acquired your share in the company from the estate of your spouse who passed away in 2011. Your spouse had acquired his/her share in the company at least 15 years prior to him/her passing away. You intend to sell your share in the company within 2 years of the date of the death of your spouse. The sale of your shareholding will result in a capital gain. The company is carrying on a business and its turnover has never exceeded $500,000. You are selling your share in the company as part of your transition to retirement. You are retiring from all paid employment. You are over 55 years of age. Your spouse was over 55 years of age when he/she passed away. Your tax agent has advised that you satisfy the maximum net asset value test. Your tax agent has advised that the company has active assets with a market value of at least 80% of the market value of all its assets. Your tax agent has stated that you may place the proceeds from the sale of your shareholding into your superannuation fund. Your tax agent has stated that any amount you contribute to superannuation will be covered by a valid and acknowledged notice under section 290-170 of the ITAA 1997. Your tax agent has stated that should you contribute any funds to superannuation you will not be eligible to claim a deduction against your assessable income.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152, | Income Tax Assessment Act 1997 Subdivision 152-A, | Income Tax Assessment Act 1997 section 104-10, | Income Tax Assessment Act 1997 section 152-10/15, | Income Tax Assessment Act 1997 section 152-40(3), | Income Tax Assessment Act 1997 section 152-50/65/70/105, | Income Tax Assessment Act 1997 section 290-170, | Income Tax Assessment Act 1997 section 292-90.

Reasons for decision: Detailed Reasoning - Question 1:: You will have a capital gains tax (CGT) event if you sell or give a way a 'CGT asset'. A share in a company is an example of a CGT asset. Under the CGT small business 15-year exemption in section 152-105 of the ITAA 1997, you can disregard any capital gain arising from the disposal of a CGT asset if all of the following conditions are satisfied: (1) the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain; (2) you continuously owned the CGT asset for the 15-year period ending just before the CGT event; and (3) 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 during which you owned the CGT asset; and (4) either: you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or you are permanently incapacitated at the time of the CGT event. | Detailed Reasoning - Condition (1): Section 152-10 of the ITAA 1997 contains the basic conditions to be satisfied. These conditions are: a CGT event happens in relation to a CGT asset in an income year. This condition does not apply in the case of CGT event D1; the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain; 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; and the CGT asset satisfies the active asset test. | Detailed Reasoning - Basic condition (a): In your case, when you sell your share in the company, CGT event A1 under section 104-10 of the ITAA 1997 which relates to the disposal of a CGT asset will occur. Therefore, this basic condition will be satisfied. | Detailed Reasoning - Basic condition (b): The CGT event will result in a capital gain apart from Division 152 of the ITAA 1997 and this basic condition will be satisfied. | Detailed Reasoning - Basic condition (c): You have stated that you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 and this basic condition will be satisfied. | Detailed Reasoning - Basic condition (d): This condition requires that the active asset test is satisfied. Section 152-40(3) of the ITAA 1997 states that where the CGT asset is a share in a company, the share will be an active asset where: · it is share in an Australian resident company; and · the total of the following is 80% or more of the market value of all of the assets of the company : · 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 the company carries on; and · any cash of the company or trust that is inherently connected with such a business. In your case, you have stated that the company has active assets with a market value of at least 80% of the market value of all its assets. Therefore, the active asset test and this basic condition will be satisfied. | Detailed Reasoning - Summary for basic conditions: In your case, all of the basic conditions will be satisfied which means condition (1) for the small business 15-year exemption will be satisfied. | Detailed Reasoning - Condition (2): This condition requires that you must have continuously owned the CGT asset for the 15-year period ending just before the CGT event. In your case, you have only owned the share in the company since it passed to you as a beneficiary of your late spouse's estate. However, your spouse owned the share for over 15 years prior to him/her passing away. In this regard, section 152-80 of the ITAA 1997 states that the beneficiary of a deceased estate will be eligible for the small business CGT concessions where: · a CGT asset is disposed of within two years of the date of death of the deceased person; and · the asset would have qualified for the small business CGT concessions under Division 152 of the ITAA 1997 if the deceased had disposed of the asset immediately before his or her death. To qualify, the asset must have been held for at least 15 years and the owner of the asset must have been over 55 years of age at the time. As your spouse owned the share for over 15 years prior to his/her passing away and he/she was over 55 years of age at the time, he/she would have met this condition. You have also stated that you intend to dispose of the share within 2 years of his/her passing away, therefore this condition will be satisfied. | Detailed Reasoning - Condition (3): Section 152-50 of the ITAA 1997 specifies that a company will satisfy the significant individual test if the company had at least one significant individual just before the CGT event. An individual is a significant individual in a company if the individual has a small business participation percentage in the company of at least 20%. Sections 152-65 and 152-70 of the ITAA 1997 specify that the small business participation percentage comprises of the sum of the direct and indirect small business participation percentage the individual has in a company. A direct small business participation percentage an individual has in a company is the percentage of: · voting power the individual is entitled to exercise; · any dividend payment the individual is entitled to receive; or · any capital distribution the individual is entitled to receive. In the case of the company, there have only ever been two shareholders at any one time for a period of at least 15 years. Each shareholder has 50% of the voting power of the company. Therefore, both shareholders have a small business participation percentage of at least 20% which means they qualify as significant individuals. Therefore, the company had a significant individual for a period totalling at least 15 of the years of ownership of the CGT asset, and this condition will be satisfied. | Detailed Reasoning - Condition (4): As discussed in condition (b) above, section 152-80 of the ITAA 1997 states that the beneficiary of a deceased estate will be eligible for the small business CGT concessions where the asset would have qualified for the small business CGT concessions under Division 152 of the ITAA 1997 if the deceased had disposed of the asset immediately before his or her death. One of the qualifying conditions was that the owner of the asset must have been over 55 years of age at the time. Your late spouse was over 55 years of age immediately before he/she passed away. Therefore, this condition will be satisfied. | Detailed Reasoning - Conclusion: As you will satisfy all of the above conditions, the CGT small business 15-year exemption in section 152-105 of the ITAA 1997 will apply to you when you dispose of your share in the company. You will be entitled to disregard any capital gain you make from the disposal. | Detailed Reasoning - Question 2:: The Individual tax return instructions supplement 2012 states that if you disregarded a capital gain that occurred during the year you do not have to record an amount in the capital gains section of your income tax return. | Detailed Reasoning - Question 3:: Page 43 of the Advanced guide to capital gains tax concessions for small business 2011-12 states that a distribution of an exempt amount under the small business 15-year exemption has no superannuation implications. Therefore, the proceeds from the disposal of your shareholding will not have to be placed into superannuation should you not wish to. | Detailed Reasoning - Question 4:: You have stated that you may place the proceeds of the disposal of your shareholding into a superannuation fund in your name. Section 292-90 of the ITAA 1997 states that a contribution you make to a complying superannuation fund will be treated as a non-concessional contribution provided the amount you contribute is covered by a valid and acknowledged notice under section 290-170 of the ITAA 1997; to the extent that you do not claim this amount as a deduction against your assessable income for the year. Your tax agent has stated that you are aware of these conditions and will comply with them. Therefore any amount you contribute to your superannuation fund from the sale of your shareholding will be treated as a non-concessional contribution.

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