Private ruling: Small business capital gains tax concessions
Published: July 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Can you apply the 50% active asset reduction in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) to the sale of a portion of your business? | A1: Yes. | Q2: Can you apply the retirement exemption in Subdivision 152-D of the ITAA 1997 to the sale of a portion of your business? | A2: Yes.

Relevant facts and circumstances: The company commenced operating a business during the 200X financial year. In the relevant financial year, the company sold a portion of the business and made a capital gain. The two shareholders of the company each hold 50% of the shares. They have held these shares since the company commenced. Individual A is a shareholder and a significant individual of the company. Individual A is over 55 years of age and has not used any portion of the lifetime retirement exemption limit. The company has a turnover of less than $2 million. The company has net assets of less than $6 million. The portion of the business that was sold was an active asset under section 152-35 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152-C | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section152-50 | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 subsection 152-305(2) | Income Tax Assessment Act 1997 section 152-320

Reasons for decision: Summary: 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. Division 152-C of the ITAA 1997 applies the small business 50% active asset reduction provided the basic conditions are satisfied. 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. | Detailed Reasoning - Application to your circumstances: In this case, the company disposed of a portion of its business and made a capital gain. The company is a small business entity with a turnover of less than $2 million and has net assets of less than $6 million. The asset disposed of by the company satisfies the active asset test. The company satisfies the basic conditions for the small business capital gains tax concessions. Therefore, the company is entitled to apply the 50% active asset reduction to any capital gain made on the sale of the business. | Detailed Reasoning - Question 2: 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 a company or trust, other than a public entity, you can choose to disregard all or part of a capital gain where you meet all the following conditions contained in subsection 152-305(2) of the ITAA 1997: · you satisfy the basic conditions · you satisfy the significant individual test under section152-50 of the ITAA 1997 · you keep a written record of the amount you choose to disregard (the exempt amount) and, if there are more than one CGT concession stakeholder, each stakeholder's percentage of the exempt amount · you make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount · the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less and · where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession. If a CGT concession stakeholder is under 55 years old just before receiving a payment, an amount equal to that payment must be immediately paid to a complying superannuation or retirement savings account on their behalf. There is no requirement to make this contribution if the stakeholder was 55 years old or older. | Detailed Reasoning - CGT retirement exemption limit: The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment. Under section 152-320 of the ITAA 1997, an individual's lifetime CGT retirement exemption limit is $500,000 reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. | Detailed Reasoning - CGT concession stakeholder: Under section 152-60 of the ITAA 1997, an individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero. This participation percentage can be held directly or indirectly through one or more interposed entities. The percentages are worked out in the same way as for the significant individual test. | Detailed Reasoning - Significant individual test: Under 152-55 of the ITAA 1997, an individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. This 20% can be made up of direct and indirect percentages. A company or trust satisfies the significant individual test if it had at least one significant individual just before the CGT event. Under section 152-70 of the ITAA 1997, an entity's direct small business participation percentage in a trust is the percentage of: · distributions of income that the entity is beneficially entitled to during the income year, or · distributions of capital that the entity is beneficially entitled to during the income year, or · if the two percentages above apply, then the smaller of the two. | Detailed Reasoning - Application to your circumstances: In this case, individual A is a 50% shareholder in the company. As individual A has a small business participation percentage in the company of more than 20% they are a significant individual of the company. As individual A is over 55 years of age, the company is not required to make a payment to a complying superannuation fund or retirement savings account on their behalf. Therefore, provided a payment is made to individual A and a written record of the amount disregarded is kept; the company will be entitled to apply the retirement exemption to the capital gain.