Do you meet the conditions to apply the small business retirement exemption in section 152-305 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard all or part of the capital gain made on the sale of your business?
Yes This ruling applies for the following period : 30 June 20XX The scheme commenced on: 1 July 20XX
You are a small business entity who conducts the business of Finance Broking. Your business commenced in June 20XX. You established and maintained a client base for the 8 years you owned the business. Your aggregated turnover for the current year is less than $2 million. Your business ceased operations in 20XX. You received an offer for your business, which consists of the loan book, of $X. You signed a contract dated XX March 20XX. You are over the age of 55.
Income Tax Assessment Act 1997 section 108-5 Income Tax Assessment Act 1997 section 152-10 Income Tax Assessment Act 1997 section 152-35 Income Tax Assessment Act 1997 section 152-40 Income Tax Assessment Act 1997 section 152-305
Section 152-305 states an individual can disregard all or part of the capital gain if the following are satisfied: (a) The basic conditions in Subdivision 152-A are satisfied for the gain; and (b) If you are under 55 just before you make the choice - you contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund or an RSA; and (c) The contribution is made: (i) If the relevant CGT event J2, J5, or J6 - when you made the choice; or (ii) Otherwise - at the later of when you made the choice and when you received the proceeds. Subdivision 152-A of the ITAA 1997 is about the basic conditions for relief. Section 152-10 states the basic conditions are satisfied if: (a) A CGT event happens in relation to a CGT asset of yours in an income year (b) The event would have resulted in a 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;
(iii) You are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership; (iv) The conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year; (d) The CGT asset satisfies the active asset test. Subsection 152-10(1AA) states you are a CGT small business entity for an income year if: (a) You are a small business entity for the income year and (b) You would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million. Section 152-35: Active Asset Test The active asset test is contained in section 152-35 of the ITAA 1997. The test is satisfied where an asset is owned for less than 15 years, and the asset was an active asset of yours for a total of at least half of the period specified in subsection 152-35(2), below: The period begins when you acquired the asset; and ends at the earlier of: (a) The CGT event; and
(b) If the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business. Section 152-40 of the ITAA 1997, states that a CGT asset is an active asset at a time if, at that time: (a) You own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by: (i) You; or (ii) Your affiliate; or (iii) Another entity that is connected with you; or (b) If the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you. Is the loan book considered to be an active asset of the business? A CGT asset is any kind of property, or a legal or equitable right that is not property (subsection 108-5(1) of the ITAA 1997). Taxation Ruling TR 2000/1 Income tax: insurance registers
(TR 2000/1) provides guidelines on the taxation consequences of acquiring or disposing of an insurance register. In accordance with paragraph 2 of TR 2000/1, for the purposes of the ruling an insurance register is a record of the rights of an insurance agent to future commissions and a record of policyholders that an agent has an exclusive right to deal with on behalf of an insurance company. TR 2000/1 considers that an insurance register is a capital asset where it is held as part of the profit-making structure of a business (paragraph 11 of TR 2000/1). Loan books are comparable to insurance registers. As the loan book you own forms part of the profit yielding structure of your mortgage broking business, the Commissioner considers the loan book to be the CGT asset. Application to your circumstances In your case, you are a small business entity that established and maintained a client base, in your case a loan book, for 8 years. Therefore, the basic conditions of Subdivision 152-A of the ITAA applicable to your circumstances are satisfied.
You are over 55 years of age. As such, the conditions in section 152-305 of the ITAA 1997 are satisfied and you can choose to disregard a capital gain arising from the sale of your business, subject to the $500,000 lifetime limit.