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Ruling

Subject: Capital gains tax small business concessions

Question

Will the shares you hold in company A be considered active assets for the purposes of the capital gains tax (CGT) small business concessions?

Answer: Yes

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

A Trust is a discretionary family trust that was set up to hold shares in Company A.

Prior to the sale transaction, the director of the trustee of A Trust was also a director of Company A.

A Trust owned around x% of the total shares in Company A.

The only assets of Company A are cash and x% holding in another company, Company B, which owns and operates numerous businesses around Australia. The market value of Company A's assets just prior to the share sale are as follows:

Cash: $x

Shares in Company B: $x

The cash is at face value and inherently connected with the business, and the value of the shares in Company B is based on the offer to purchase the shares, which was accepted and settled.

One hundred per cent of the shares in Company A were sold to an external party, Company C. Company C already directly owned the other x% of the shares in Company B. Through their acquisition of the Company A shares, they indirectly gained ownership of the remaining x% of Company B, becoming 100% shareholders of Company B.

The sale of the Company A shares has resulted in a gross capital gain for the relevant financial year.

You state that the shares in Company B will be considered active, as the directors have determined the market value of the assets of the company is made up of at least x% active assets.

You state that the directors have confirmed that at least x% of the market value of the assets of Company A were active assets for more than x% of the time since the shares were acquired by A Trust.

You state that at least x% of the market value of the assets of Company B were active assets for more than x% of the time since the Company B shares were acquired by Company A.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subsection 152-40(1)

Income Tax Assessment Act 1997 Subsection 152-40(3)

Income Tax Assessment Act 1997 Subsection 152-40(3B)

Income Tax Assessment Act 1997 Subsection 152-40(3A)

Reasons for decision

Summary

The market value of Company A's active assets is more than x% of the market value of all the company's assets. In addition, the market value of the active assets, financial instruments and cash of the company were more than x% of the market value of the all the assets of the company for over half the period of your share ownership. Accordingly, the shares held in the company satisfy the active asset test.

Detailed reasoning

A capital gain which you make on the disposal of a capital gains tax (CGT) asset may be reduced or disregarded under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) if certain conditions are satisfied. One of these conditions requires that the CGT asset satisfies the active asset test contained in section 152-35 of the ITAA 1997.

A CGT asset will satisfy the active asset test 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,

The test period beings when you acquired the asset and ends at the earlier of the CGT event and if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business.

Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Subsection 152-40(3) of the ITAA 1997 provides that a share in a company that is an Australian resident can also be an active asset. This is provided that 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.

As the active asset test requires a CGT asset to have been an active asset for at least half of a particular period, as outlined earlier, in order for a share in an Australian resident company to meet this requirement, the company must satisfy the 80% test for that same period.

The 80% test will be taken to have been met:

· where breaches of the threshold are only temporary in nature (subsection 152-40(3B) of the ITAA 1997), and

· in circumstances where it is reasonable to conclude that the 80% threshold has been passed (subsection 152-40(3A) of the ITAA 1997), such as when there have been no significant changes to the assets or liabilities of the company.

Importantly, an interest in an entity that itself holds interests in another entity that operates a business may be an active asset, depending on the successive application of the 80% test at each level.

Application to your circumstances

The CGT assets to be disposed of are the shares in Company A. The shares will be active assets if they meet the 80% market value test.

The assets of Company A include cash and shares in Company B. The cash is inherently connected with the company's business and is therefore considered an active asset. The shares in Company B will only be active assets if Company B also passes the 80% market value test. You state that Company B is an entity that operates numerous businesses around Australia and the directors of Company B have confirmed that the market value of the assets of the company is made up of at least 80% active assets. Therefore, the shares in Company B will be active assets.

Based on the information provided, the total market value of Company A's active assets, cash and financial instruments (that are inherently connected with the business) is more than 80% of the market value of all the assets of the company. In addition, you have advised that the market value of the active assets, financial instruments and cash of the company were more than 80% of the market value of the assets of the company for over half the period of your share ownership.

Accordingly, as the shares held in Company A satisfy the active asset test under section 152-35 of the ITAA 1997, they will be considered active assets for the purpose of the CGT small business concessions.

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