Private ruling: Capital gains tax small business concessions (SBC)
Date of advice: 2 February 2018
Published: June 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you eligible to apply the capital gains tax (CGT) small business 15 year exemption on the disposal of your business? | A1: No | Q2: Are you eligible to apply the CGT small business retirement exemption on the disposal of your business? | A2: Yes

Relevant facts and circumstances: During the 2017-18 income year R Pty Ltd (the company) sold the business (the business) that the company operated. The company was established on XX August 19XX with the following ownership structure: 1/3 shareholding - C 1/3 shareholding - D 1/3 shareholding - E The business has been operated by the company for more than 15 years. Upon C’s death on DDMMYY, C’s 1/3 shareholding in the company was passed to E. Upon D’s death on DDMMYX, D’s 2/3 shareholding in the company was passed to E. At the time of the disposal of the business, E held 100% of the shares in the company. E was 54 years of age at the time of the disposal of the business by the company. The company meets the basic conditions to apply the CGT small business concessions. The business the company sold was an active asset for the company.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-110 | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 subsection 152-305(2) | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 section 152-320

Reasons for decision: Summary: Section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a small business 15 year exemption for companies and trusts. Under this section, a company can disregard the capital gain from the disposal of a CGT asset if: (a) the company satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions (b) the company continuously owned the CGT asset for the 15-year period ending just before the CGT event happened (c) the company had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which time the company owned the CGT asset; and (d) an individual who was a significant individual of the company just before the CGT event was either: ● at least 55 years old at that time and the event happened in connection with their retirement or ● permanently incapacitated at that time. 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. In your case, the company satisfies the basic conditions and has continuously owned the business for more than 15 years at the time just before the CGT event occurred. The company has had a significant individual, E, for at least 15 years, however E was 54 years old just before the CGT event occurred, being the disposal of the business. As such the company does not meet the required conditions under section 152-110 of the ITAA 1997 to apply the small business 15 year 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. 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 ● you keep a written record of the amount you choose to disregard (the exempt amount) and, if there are more than one CGT concession stakeholders, each stakeholder’s percentage of the exempt amount (one may be nil, but together they must add up to 100%) ● 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 (up to the asset’s CGT exempt amount). 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 (RSA) 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. There is no requirement to make this contribution if the stakeholder was 55 years old or older. You must make payments: ● seven days after you choose to disregard the capital gain if you choose the retirement exemption for a J2, J5 or J6 event, or ● in any other case, by the later of ● seven days after you choose to disregard the capital gain, and ● seven days after you receive the capital proceeds from the CGT event. Section 152-60 of the ITAA 1997 provides that an individual is a CGT concession stakeholder of a company or trust at a time if the individual is a significant individual in the company or trust. 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. In your case, the company meets the basic conditions, satisfies the significant individual test and E would be considered the CGT concession stakeholder of the company. The company will be eligible to apply the small business retirement exemption as long as it meets the remaining requirements under subsection 152-305(2) of the ITAA 1997 relating to the keeping of written records of the amount disregarded, timing of payment and requirement to make payment to a complying superannuation fund or retirement savings account (RSA) on E’s behalf.