Private ruling: Small business capital gains tax concessions
Published: May 2013
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the individual a CGT concession stakeholder of the company? | A1: Yes. | Q2: Can the company apply the retirement exemption in Subdivision 152-D of the Income Tax Assessment Act 1997 to the capital gain made on the sale of active assets? | A2: Yes.

Relevant facts and circumstances: Individual A was allotted X shares in the company. The company is a small business entity. The company entered into an agreement to sell significant business assets. This transaction resulted in a capital gain. The assets sold by the company satisfied the active asset test. Individual B, the spouse of individual A, owns more than 20% of the shares in the company. Individual A is under 55 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A; and | Income Tax Assessment Act 1997 Subdivision 152-D.

Reasons for decision: Detailed Reasoning - Basic conditions: The basic conditions for the small business CGT concessions are set out in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997). The basic conditions relevant in this case are the small business entity test and the active asset test. In the application for private ruling it was stated that the company is a small business entity and that the assets sold by the company were active assets. Therefore, the company has satisfied the basic conditions for the CGT concessions. | Detailed Reasoning - Retirement exemption: The rules covering the small business retirement exemption are contained in Subdivision 152-D of the ITAA 1997. An entity may choose to disregard all or part of a capital gain under the retirement exemption if certain conditions are satisfied. If the entity is a company or trust, they can choose to disregard all or part of a capital gain where all of the following conditions are met: · the company satisfies the basic conditions · the company satisfies the significant individual test · a written record of the amount disregarded is kept and if there are more than one CGT concession stakeholders, each stakeholder's percent of the exempt amount (one may be nil, but together they must add up to 100%) · a payment is made to at least one of the 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 the capital proceeds are received in instalments, a payment is made 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 fund or retirement savings account on their behalf. The company or trust must notify the trustee of the fund or the RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption. The amount of the capital gain the company disregards cannot exceed the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment. 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 - Significant individual test: An individual is a significant individual of a company if they have a small business participation percentage in the company of at least 20%. This 20% can be made up of direct and indirect percentages. A company will satisfy the significant individual test if it had at least one significant individual just before the CGT event. An entity's small business participation percentage in another entity at a time is the percentage that 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. An entity's direct small business participation percentage in a company is the percentage of: · voting power that the entity is entitled to exercise · any dividend payment that the entity is entitled to receive, or · any capital distribution that the entity is entitled to receive, or · if they are different, the small of the three. The participation percentage can be held directly or indirectly through one or more interposed entities. | Detailed Reasoning - CGT concession stakeholder: An individual is a CGT concession stakeholder of a company 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 at that time that is greater than zero. The percentages are worked out in the same way as for the significant individual test. | Detailed Reasoning - Application to your circumstances: In this case, the company satisfies the basic conditions. To be eligible to apply the retirement exemption, the company must also satisfy the significant individual test. This test requires the company to have had at least one significant individual just before the CGT event. Individual B has a small business participation percentage in the company of more than 20%. Therefore, individual B was a significant individual of the company just prior to the CGT event. Individual A is the spouse of a significant individual. As individual A had a small business participation percentage in the company, at that time, of more than 0, individual A will be a CGT concession stakeholder of the company. As the CGT concession stakeholder is under 55 years of age, the company is required to make a payment to a complying superannuation fund or retirement savings account on their behalf. Therefore, provided the conditions associated with making the payment are satisfied, the company is entitled to apply the retirement exemption to the capital gain made on the sale of the active assets.