Private ruling: Small business CGT concessions - shares - active asset - retirement exemption
Date of advice: 15 March 2016
Published: May 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Can you apply the small business 50% (active asset) reduction to the capital gain you made on the disposal of your shares in Company A? | A1: Yes. | Q2: Can you choose to apply the small business 50% retirement exemption and disregard the capital gain you made (up to your CGT retirement limit) on the disposal of your shares in Company A? | A2: Yes. | Q3: Can you choose to apply the small business rollover to defer all or part of the remaining capital gain made on the disposal of your shares in Company A? | A3: Yes.

Relevant facts and circumstances: You are a sole trader. The turnover of your business for the year ended 30 June 20XX was $XXXX. You are over 55 years old. Company A is an Australian resident. Company A listed on the stock exchange and as part of the listing you sold some ordinary shares in Company A. As at the date of the sale all shares in Company A were ordinary shares with the same terms and conditions as the shares sold by you. You held more than 20% of the issued shares in Company A just prior to the sale. You control a discretionary trust which carries on a business. The annual turnover of the Trust during the year ended 30 June 20XX was $YYYY. You also control other trusts and are a partner in a partnership. These trusts and the partnership did not carry on any businesses during the year ended 30 June 20XX. You and your immediate family members did not individually or collectively own, or have the right to acquire, either directly or indirectly, more than 40% of interests in any company during the year ended 30 June 20XX. You and your immediate family members were not individually or collectively entitled to 40% or more of the net partnership income, or any distribution of income or capital of any entities other than those mentioned above. You and your immediate family members did not control directly or indirectly the trustee of any other discretionary trust other than those mentioned above during the year ended 30 June 20XX, nor were you or your family members paid 40% or more of the capital or income distributions from any other discretionary trust other than those mentioned above in any of the four years prior to the year ended 30 June 20XX. Based on the Balance Sheets of Company A throughout your ownership period for the shares disposed of at least 80% of the assets held by Company A satisfied the active asset test.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 152 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 subsection 152-10(1) | Income Tax Assessment Act 1997 subsection 152-10(2) | Income Tax Assessment Act 1997 paragraph 152-10(2)(a) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 subsection 152-35(2) | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 subsection 152-40(3) | Income Tax Assessment Act 1997 subsection 152-40(3A) | Income Tax Assessment Act 1997 subsection 152-40(3B) | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 section 152-65 | Income Tax Assessment Act 1997 subsection 152-70(1) | Income Tax Assessment Act 1997 section 152-75 | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 section 152-205 | Income Tax Assessment Act 1997 section 152-220 | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 subsection 152-305(1) | Income Tax Assessment Act 1997 subsection 152-315(4) | Income Tax Assessment Act 1997 subsection 152-320(1) | Income Tax Assessment Act 1997 Subdivision 152-E | Income Tax Assessment Act 1997 section 152-400 | Income Tax Assessment Act 1997 subsection 328-110(4) | Income Tax Assessment Act 1997 section 328-115 | Income Tax Assessment Act 1997 section 328-120 | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 subsection 328-125(2) | Income Tax Assessment Act 1997 paragraph 328-125(2)(a) | Income Tax Assessment Act 1997 paragraph 328-125(2)(b) | Income Tax Assessment Act 1997 subsection 328-125(3) | Income Tax Assessment Act 1997 subsection 328-125(4) | Income Tax Assessment Act 1997 subsection 328-125(7) | Income Tax Assessment Act 1997 subsection 328-130(1) | Income Tax Assessment Act 1997 subsection 328-130(2)

Reasons for decision: Summary: Small business 50% active asset reduction The rules covering the small business 50% active asset reduction are contained in Subdivision 152-C of the Income Tax Assessment Act 1997 (ITAA 1997). The amount of a capital gain remaining after applying the general 50% CGT discount is reduced by a further 50% if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied (section 152-205 of the ITAA 1997), unless you choose for it not to apply (section 152-220 of the ITAA 1997). The capital gain, as reduced under the small business 50% active asset reduction in section 152-205 of the ITAA 1997, may also qualify for the small business retirement exemption, a small business rollover, or both (section 152-10 of the ITAA 1997). Small business retirement exemption As you are over 55 and an individual, you can choose to disregard all or part of a capital gain if: • you satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 (subsection 152-305(1) of the ITAA 1997), and • you keep a written record of the amount you choose to disregard (subsection 152-315(4) of the ITAA 1997. The amount of the capital gain that you choose to disregard must not exceed your CGT retirement exemption limit. 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 (subsection 152-320(1) of the ITAA 1997). Small business rollover The small business rollover allows you to defer the making of a capital gain from a CGT event happening if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied (section 152-400 of the ITAA 1997). You may choose to apply the small business rollover to as much of the capital gain as you decide after applying the small business 50% active asset reduction, that is, to the remaining 50% (or if the general CGT discount applied, the remaining 25%) of the capital gain after you have applied capital losses. Basic conditions The basic conditions (as they are relevant in your case) that must be satisfied are: • a CGT event happened in relation to your shares in the relevant income year • the event resulted in a gain • you are a small business entity for the relevant income year, and • the shares satisfy the active asset test in section 152-35 of the ITAA 1997. Additional basic condition (as relevant in your case) for shares in a company As you are an individual and the relevant CGT assets are your shares in company A, you must have been a CGT concession stakeholder in Company A just before the CGT event (paragraph 152-10(2)(a) of the ITAA 1997). Active Asset test A CGT asset will satisfy the active asset test 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 (subsection 152-35(1) of the ITAA 1997). The test period begins when you acquired the asset and ends at the time of the CGT event (subsection 152-35(2) of the ITAA 1997). A share in a company that is an Australian resident is an active asset at a given time if, at that time, the total of: • 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 that the company carries on, and • any cash of the company that is inherently connected with such a business, is 80% or more of the market value of all of the assets of the company (subsection 152-40(3) of the ITAA 1997). The 80% test does not need to be applied on a day to day basis. If a share was an active asset at an earlier point in time and it is reasonable to conclude that the share is still an active asset at a later time the share will still be considered an active asset (subsection 152-40(3A) of the ITAA 1997). In addition, the 80% test is taken to have been met where breaches of the 80% threshold are only temporary in nature (subsection 152-40(3B) of the ITAA 1997). Small business entity You are a small business entity for an income year (the current year) if: (a) you carry on a business in the current year, and (b) your aggregated turnover for the current year, worked out as at the end of that year, is less than $2 million (subsection 328-110(4) of the ITAA 1997). Aggregated turnover and annual turnover Your aggregated turnover includes: • your annual turnover for the income year • the annual turnover of any entity connected with you at any time during the income year, and • the annual turnover of any entity that is an affiliate of yours at any time during the income year (section 328-115 of the ITAA 1997). An entity's annual turnover for an income year is the total ordinary income that the entity derives in the income year in the ordinary course of carrying on a business (section 328-120 of the ITAA 1997). Meaning of connected with an entity An entity is connected with another entity if: (a) either entity controls the other entity in the way described in this section, or (b) both entities are controlled in a way described in this section by the same third entity (section 328-125 of the ITAA 1997). Different control rules apply to different types of entities. That is, different control tests apply to companies, non-discretionary trusts, discretionary trusts and partnerships. Connected with an entity other than a discretionary trust The direct control rules for a non-discretionary trusts, companies and partnerships are contained in subsection 328-125(2) of the ITAA 1997. You control a non-discretionary trust, company or partnership if you, your affiliates, or you together with your affiliates beneficially own, or have the right to acquire the beneficial ownership of, interests in the entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of any distribution of income or capital by the entity (paragraph 328-125(2)(a) of the ITAA 1997). You control a company if you, your affiliates, or you together with your affiliates beneficially own, or have the right to acquire the beneficial ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company (paragraph 328-125(2)(b) of the ITAA 1997). Connected with a discretionary trust An entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates, or the first entity together with its affiliates (subsection 328-125(3) of the ITAA 1997). An entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year: a) the trustee of the trust paid to, or applied for the benefit of: i. the first entity ii. any of the first entity's affiliates, or iii. the first entity and any of its affiliates, any of the income or capital of the trust; and b) the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year (subsection 328-125(4) of the ITAA 1997). Indirect control of an entity An entity can control another entity indirectly in the manner described in subsection 328-125(7) of the ITAA 1997: This section applies to an entity (the first entity) that directly controls another entity (the second entity) as if the first entity also controlled any other entity that is directly, or indirectly by any other application or application of this section, controlled by the second entity. Meaning of Affiliate An individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company (subsection 328-130(1) of the ITAA 1997). However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share (subsection 328-130(2) of the ITAA 1997). Trusts, partnerships and superannuation funds, as well as individuals or companies that do not carry on a business cannot be your affiliates. CGT concession stakeholder An individual is a CGT concession stakeholder of a company if they are a significant individual in the company, or the spouse of a significant individual, if the spouse has a small business participation percentage in the company at that time that is greater than zero (section 152-60 of the ITAA 1997). Significant individual An individual is a significant individual in a company if they have a small business participation percentage in the company of at least 20% (section 152-55 of the ITAA 1997). This 20% can be made up of direct and indirect percentages. Small business participation percentage 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 (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 • 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 smaller or smallest (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). | Detailed Reasoning - Application to your circumstances: In your case, you sold shares held in Company A. Therefore, in order to access the small business concessions you will not only have to satisfy the standard basic conditions, but also one of the additional basic conditions set out in subsection 152-10(2) of the ITAA 1997. You satisfy the basic conditions because: • a CGT event occurred when you disposed of the shares in Company A • the event resulted in a gain • you were a small business entity at the time of the event (as your aggregated turnover was less than $2 million), and • the shares pass the active asset test (as at least 80% of the assets held by Company A satisfy the active asset test). In addition, as you held more than 20% of the shares issued in Company A just before the CGT event you had a small business participation percentage in Company A of more than 20%, and as such you were a CGT concession stakeholder in Company A at that time. Therefore, you also satisfy the additional basic condition set out in paragraph 152-10(2)(a) of the ITAA 1997. As you satisfy the basic conditions you are entitled to apply the small business 50% (active asset) reduction to the net capital gain remaining after applying any current year capital losses and any unapplied prior year net capital losses, and the general 50% CGT discount. You may then choose to disregard the remaining net capital gain under the small business retirement exemption provided you keep a written record of the amount you choose to disregard. The amount of the capital gain that you can choose to disregard under the retirement exemption must not exceed your CGT retirement exemption limit of $500,000. After applying the retirement exemption you may choose to defer all or part of the remaining capital gain under the small business rollover.