Private ruling: CGT – small business concessions – active asset – shares and retirement exemption
Date of advice: 25 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Do you satisfy the basic conditions to apply the capital gains tax (CGT) small business concessions? | A1: Yes | Q2: Do you satisfy the conditions to apply the CGT small business retirement exemption? | A2: Yes

Relevant facts and circumstances: You established the company on XX February 20XX with the issue of X ordinary shares. You were the sole shareholder and director of the company. The company commenced trading on XX July 20XX. On XX December 20XX you completed a share split in which the X ordinary shares became X ordinary shares. On XX January 20XX you sold X of your shares in the company for $X which resulted in a capital gain. The active assets of the company have a market value of more than 80% of the total assets. You satisfy the net maximum asset test. You were over 55 years at the time of the disposal of the shares.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 subsection 152-35(2) | Income Tax Assessment Act 1997 subsection 152-40(3) | Income Tax Assessment Act 1997 Division 152-D

Reasons for decision: Summary: You satisfy the basic conditions to apply the CGT small business concessions. You are also eligible to apply the CGT small business retirement concession as long as you keep a written record of the amount disregarded and do not exceed your lifetime CGT retirement exemption limit. | Detailed Reasoning - Basic Conditions: To qualify for the CGT small business concessions, you must satisfy several conditions that are common to all the concessions. Section 152-10 of the Income tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in the gain (c) 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) 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. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. To be eligible to apply the small business CGT concessions you must satisfy all four of the basic conditions above. | Detailed Reasoning - Active asset: A CGT asset will satisfy the active asset test if you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 ½ years during 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). In your case, a CGT event occurred in relation to the disposal of your shares, which resulted in a capital gain and you satisfy the maximum net asset test. As more than 80% of the assets of the company are active assets, your shares are considered active assets and have been active assets for more than half of the period you have held them, therefore satisfying the active asset test. As you have met the basic conditions you are eligible to apply the CGT small business concessions. | Detailed Reasoning - Retirement exemption: 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. As an individual you can choose to disregard all or part of a capital gain if: ● you satisfy the basic conditions ● you keep a written record of the amount you chose to disregard (the CGT exempt amount), and ● if you are under 55 years old just before you choose to use the retirement exemption, you make a person contribution equal to the exempt amount to a complying superannuation fund or retirement savings account. There is no requirement to make this contribution if the individual was 55 years old or older. The amount of capital gain you choose to disregard (that is the CGT exempt amount) 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. In your case, you have satisfied the basic conditions and you were more than 55 years of age at the time of the CGT event, so there is no requirement to make a contribution to a complying superannuation fund. As long as you keep a written record of the amount you choose to disregard and that amount does not exceed your lifetime CGT retirement exemption limit, you satisfy the conditions to apply the CGT small business retirement concession.