Edited version of private ruling

Authorisation Number: 1011493102336

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Ruling

Subject: Capital Gains Tax

Question 1:

Will the small business 50% reduction in section 152-205 of the ITAA 1997 apply to reduce any capital gains resulting from the sale of your shares in a company?

Answer:

Yes.

Question 2:

Are you entitled to choose the small business retirement exemption in subsection 152-305(1) of the ITAA 1997, in respect of any capital gains resulting from the sale of the shares?

Answer:

Yes.

Year(s) of income or period(s) to which this ruling applies:

Year ended 30 June 2011

Commencement date of scheme:

1 July 2010

The scheme that is the subject of the ruling:

You are the sole shareholder and director of a company.

The company was recently incorporated and carries on a business.

You consider that an intangible asset in the form of business goodwill has been created by the business activities of the company.

You are now in a position where you might sell all of your shares in the company and then have little involvement with the business. You might be asked to provide advice, but you will have no equity interest.

You will be over 55 years of age at the time that the choice for the retirement exemption will be made.

The net value of CGT assets owned by you and your relevant related entities for the maximum net asset value test do not exceed $6 million.

The company is an Australian resident.

Including the business goodwill, the total of:

· the market value of the active assets of the company, and

· 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 for the whole period from incorporation to the time of sale of the shares.

You will be the sole shareholder of the company from the time of incorporation to the time of the sale of the shares.

Relevant provisions:

Income Tax Assessment Act 1997 Subsection 102-5(1).

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Subsection 108-5(2).

Income Tax Assessment Act 1997 Section 152-10.

Income Tax Assessment Act 1997 Section 152-15.

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Section 152-40.

Income Tax Assessment Act 1997 Section 152-205.

Income Tax Assessment Act 1997 Subsection 152-305(1).

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Explanation: (This does not form part of the notice of private ruling)

Both of the small business capital gains tax (CGT) concessions known as the small business 50% reduction and the small business retirement exemption require that the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied. The small business retirement exemption also requires other conditions to be satisfied.

Basic conditions

Subsection 152-10(1) of the ITAA 1997 contains the basic conditions to be satisfied. These conditions are:

a CGT event happens in relation to a CGT asset of yours in an income year. This condition does not apply in the case of CGT event D1

the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain

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 or

· 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.

the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

As the CGT assets in your case are shares in a company, one of these additional basic conditions in subsection 152-10(2) of the ITAA 1997 must be satisfied just before the CGT event:

· you are a CGT concession stakeholder in the object company or

· CGT concession stakeholders in the object company together have a small business participation percentage in you of at least 90%.

Paragraph 152-10(1)(a)

This condition requires a CGT event to happen in relation to your CGT asset in an income year. The assets in question are your shares in the company. Shares in a company are CGT assets (subsection 108-5(2) of the ITAA 1997).

The relevant CGT event will be when you dispose of your shares, which will cause CGT event A1 to happen (section 104-10 of the ITAA 1997).

As the CGT event, not being CGT event D1, will happen in relation to a CGT asset of yours in the income year in which the disposal occurs, this condition will be satisfied.

Paragraph 152-10(1)(b)

The above CGT event will result in the capital gain, and this condition will be satisfied.

Paragraph 152-10(1)(c)

You and your relevant related entities have a net asset value of less than $6 million, and the maximum net asset value test in section 152-15 of the ITAA 1997 will be satisfied.

Paragraph 152-10(1)(d)

This condition requires that the active asset test in section 152-35 of the ITAA 1997 is satisfied. This 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 period detailed below 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 1/2 years during the period detailed below:

The period:

· begins when you acquired the asset, and

· ends at the earlier of:

· the CGT event, and

· if the relevant business ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) - when the business ceased.

It will therefore need to be determined if your shares in the company are active assets, and if so, whether the active asset test is satisfied.

Are your shares in the company active assets?

Section 152-40 of the ITAA 1997 explains the meaning of an active asset.

A share in a company will be an active asset under subsection 152-40(3) of the ITAA 1997 at a given time if:

· the company is an Australian resident at that time and

· the total of:

· the market values of the active assets of the company, and

· 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.

The company is an Australian resident company and condition (a) is satisfied.

You have advised that the requirements of condition (b) will be satisfied for the whole period from the incorporation of the company to the time of the sale of the shares, if it is accepted that the company is carrying on a business and the business goodwill of the company is an active asset.

The company is carrying on a business.

Taxation Ruling TR 1999/16 explains how certain CGT provisions apply to the goodwill of a business. Paragraph 12 of TR 1999/16 states that goodwill is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it. Goodwill is a quality or attribute that derives among other things from using or applying other assets of a business.

Goodwill includes whatever adds value to a business (FC of T v. Murry 98 ATC 4585; (1998) 39 ATR 129).

You consider that the activities of the company have created an intangible asset. As this intangible asset would add value to the business carried on by the company, and has been created by using the assets of this business, this intangible asset would be the goodwill of the company.

Subsection 108-5(2) of the ITAA 1997 defines a 'CGT asset' to include 'goodwill'. The goodwill of the business carried on by the company will be an active asset under paragraph 152-40(1)(b) of the ITAA 1997 because it is an intangible asset that is inherently connected with that business. Condition (b) will therefore be satisfied.

As both conditions (a) and (b) above are satisfied, your shares in the company are active assets. This applies for the whole period from the incorporation of the company to the time of the sale of the shares.

Will your shares in the company satisfy the active asset test?

As determined above, your shares in the company will be active assets for the whole period from incorporation of the company to the time of the sale of the shares. The shares will therefore satisfy the active asset test in section 152-35 of the ITAA 1997.

Additional basic conditions

As you will be the sole shareholder of the company at the time of the sale of the shares, you will satisfy additional basic condition (a) just before the time of the CGT event.

Summary for the basic conditions

You satisfy all of the required basic conditions for the purposes of the small business CGT concessions

Small business 50% reduction

Section 152-205 of the ITAA 1997 provides this small business CGT concession. This provision states that the amount of a capital gain remaining after applying step 3 of the method statement in subsection 102-5(1) of the ITAA 1997 is reduced by 50% if the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain. There are no further requirements.

As it has been determined that you satisfy the basic conditions in Subdivision 152-A of the ITAA 1997, you will be able to apply the small business 50% reduction in section 152-205 of the ITAA 1997 to reduce any capital gain resulting from the disposal of the shares.

Small business retirement exemption

Subsection 152-305(1) of the ITAA 1997 provides this small business CGT concession. This provision states that you can choose to disregard all or part of a capital gain if certain conditions are satisfied.

As you will be over 55 years of age when you make the choice for this exemption to apply, you will only be required to satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 for the gain.

As it has been determined that you satisfy the basic conditions in Subdivision 152-A of the ITAA 1997, you will be able to apply the small business retirement exemption in subsection 152-305(1) of the ITAA 1997 to disregard all or part of your capital gain on the disposal of the shares. You will need to keep a written record of the amount you choose to disregard (the CGT exempt amount).

The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) must not exceed your 'CGT retirement exemption limit'. This limit is $500,000 reduced by any previous CGT exempt amounts you have disregarded under the retirement exemption.

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