Private ruling: Small business concessions
Published: August 2018
Ruling period: Financial year ending 30 June 2018 | Financial year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Will the companies premises qualify as an active asset? | A1: Yes. | Q2: Will the capital gains tax (CGT) 15 year exemption apply to the capital gain from the disposal of the CGT asset? | A2: Yes | Q3: Is the sale in connection with the individual’s retirement in accordance with Division 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Section 995-1 Small business concessions | To qualify for the small business concessions you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. | If the basic conditions are satisfied the small business retirement exemption can be applied. | The company meets all of the requirements for the small business 15 year exemption and can disregard any capital gain made on the sale of the premises. Accordingly, it is not necessary to consider the other concessions. | Basic conditions | 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. | Active asset test | The active asset test is contained in section 152-35 of the ITAA 1997. | The active asset test is satisfied 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; or | ● 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 7.5 years during the test period. | The premises have been held and used in the business of the company for more than 7.5 years and accordingly the active test is met. | Small business 15 year exemption | For a company to be eligible for the small business 15-year exemption it must satisfy the basic conditions and three further conditions: | ● the company continuously owned the CGT asset for the 15-year period ending just before the CGT event happened, and | ● the company had a significant individual for a total of at least 15 years of the whole period of ownership (even if it was not the same significant individual during the whole period), and | ● the individual who was a significant individual just before the CGT event was | ● at least 55 years old at that time and the event happened in connection with their retirement, or | ● permanently incapacitated at that time. | The premises were purchased by the company after 1985 and have been held continuously for more than 15 years. | 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%. ‘A’ and ‘B’ own all the shares in the company since its incorporation. Accordingly they are significant individuals. | ‘A’ and ‘B’ are over 55 years of age and it is accepted that the CGT event will be in connection with their retirement. | Accordingly the company meets the additional requirements and is entitled to the small business 15 year exemption. | Where you can apply the small business 15 year exemption, any capital gain is entirely disregarded, accordingly it is unnecessary to consider the other concessions.


Relevant facts: You are an Australian Proprietary Limited entity which was incorporated after 20 September 1985. (The company). | The company has an amount of ordinary shares on issue which are owned equally by two individuals who are also directors of the company. | The shareholders are ‘A’ (ordinary shares) and ‘B’ (ordinary shares) who are also directors of the company. | Both shareholders and directors are over 55 years of age. | After a period of time you acquired land and a warehouse ('the premises') and from acquisition of the premises, you operated a business from the premises. | After a number of years you sold the business but retained the premises. The premises were an active asset for more than 7.5 years. | Following disposal of the business, you partially demolished the premises and constructed a new structure on a portion of the land. | The new structure was subsequently leased to a new business. Income currently derived by you from the lease of the structure is less than $2 million per annum. | The remaining area of the original warehouse was leased to a separate unrelated tenant and income currently derived by you from this lease is in the region of $100,000 per year. | Rents charged to both tenants are at open market value. | No entities other than the shareholders are affiliated or connected with the company. | Accordingly your aggregated turnover is less than $2 million. Your aggregated turnover for the prior financial year was less than $2 million. | The new business and remaining premises are managed by an external real estate agent. | The premises are the company's registered office. | You will dispose of the premises in the 2018 financial year. | The capital proceeds from the sale of the premises are expected to be $xxx million. | Once the premises are sold the company directors activities will be significantly reduced as the main asset of the company will no longer exist. | The company will be wound up in due course.