Edited version of your written advice

Authorisation Number: 1012734942297

Ruling

Subject: Small business concessions

Question 1

Do you satisfy the maximum net asset value test contained in section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Do you satisfy the active asset test contained in section 152-35 of the ITAA 1997?

Answer

Yes.

Question 3

Do you satisfy the capital gains tax (CGT) concession stakeholder test in section 152-60 for the purposes of subsection 152-10(2) of the ITAA 1997?

Answer

Yes.

Question 4

Are you eligible for the retirement exemption in subdivision 152-C of the ITAA 1997?

Answer

Yes.

Question 5

Can the family trust apply the small business capital gains tax concessions in relation to the capital gain made on the units sold in the unit trust?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are over 55 years of age.

You own X% of the ordinary shares in the company.

Voting rights are attached to all ordinary shares in proportion to shares issued.

The company runs a business.

More than Y% of the company's assets are active.

You are the primary beneficiary of the family trust.

The family trust owns X% of the units in the unit trust. The unit trust is a fixed unit trust.

The unit trust owns the commercial business premises for the business.

The business premises are leased back to the company at a market value rent for its use in running the business.

The remaining Y% of the shares in the company and the remaining Y% of the units in the unit trust are wholly owned by an unrelated third party.

During the 2013-14 financial year, you sold all of your shares in the company to the unrelated third party.

Simultaneously, the family trust sold all of its units in the unit trust to the unrelated third party.

The total market value of assets of you, your spouse, and the family trust are less than $6 million.

Relevant legislative provisions

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 152-60.

Income Tax Assessment Act 1997 Section 152-55.

Income Tax Assessment Act 1997 Section 152-65.

Income Tax Assessment Act 1997 Section 152-70.

Income Tax Assessment Act 1997 Section 152-75.

Income Tax Assessment Act 1997 Section 328-130.

Income Tax Assessment Act 1997 Section 328-125.

Income Tax Assessment Act 1997 Section 152-20.

Income Tax Assessment Act 1997 Section 152-305.

Reasons for decision

Summary

You meet the conditions to apply the small business concessions to the gain on the sale of your shares in the company.

The family trust does not meet the conditions and therefore can not apply the small business concessions to the sale the units in the unit trust.

Detailed reasoning

Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business capital gains tax (CGT) concessions. These conditions are:

(a) a CGT event happens in relation to a CGT asset in an income year.

(b) the event would have resulted in the 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 (MNAV) in section 152-15 of the ITAA 1997

iii. 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 or

iv. the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.

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

Additional basic conditions for shares in a company or units in a trust

Under subsection 152-10(2) of the ITAA 1997, if the CGT asset is a share in a company or an interest in a trust (the object company or trust), one of these additional basic conditions must be satisfied just before the CGT event:

(a) you are a CGT concession stakeholder in the object company or trust;

or

(b) CGT concession stakeholders in the object company or trust together have a small business participation percentage in you of at least 90%.

A company or trust cannot satisfy the condition in paragraph (a) because a CGT concession stakeholder in the object company or trust must be an individual.

Active asset test

Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies 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 period of ownership, 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 and a half years.

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 Y% 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 Y% test for that same period.

The Y% 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 Y% 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.

CGT concession stakeholder (additional condition)

Under section 152-60 of the ITAA 1997, an individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero.

This participation percentage can be held directly or indirectly through one or more interposed entities. The percentages are worked out in the same way as for the significant individual test.

Significant individual test

Under section 152-55 of the ITAA 1997, 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 X%. This X% can be made up of direct and indirect percentages. A company or trust satisfies the significant individual test if it had at least one significant individual just before the CGT event.

Subsection 152-70(1) of the ITAA 1997 explains that an entity's direct small business participation percentage (SBPP) in a company is the percentage of:

• voting power that the entity is entitled to exercise (except for jointly owned shares) or

• any dividend payment that the entity is entitled to receive, or

• any capital distribution that the entity is entitled to receive, or

• if they are different, the smallest of the three percentages above.

Section 152-75 of the ITAA 1997 details that an entity's indirect SBPP in a company or trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity, and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.

Maximum net asset value (MNAV) test (condition (c))

Section 152-15 of the ITAA 1997 explains that you satisfy the MNAV test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000:

(a) the net value of the CGT assets of yours;

(b) the net value of the CGT assets of any entities connected with you;

(c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).

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. Subsection 152-305(2) of the ITAA 1997 provides that a company or a trust can choose to disregard all or part of a capital gain if:

• 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 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.

Therefore, if you choose the retirement exemption after you have received the capital proceeds (for example, when you lodge your tax return) there is no requirement to make any payment until you have made the choice. Accordingly, you may use the capital proceeds for other purposes before choosing. However, once you choose, you must make the payment by the end of seven days after making the choice.

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' or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment.

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. This includes amounts disregarded under former (repealed) retirement exemption provisions.

In this case, you sold your shares in the company. You owned X% of the ordinary shares. In order to access the small business concessions, not only will you have to satisfy the standard basic conditions, but also the additional basic condition set out in section 152-10(2) of the ITAA 1997.

As you sold your shares in the company and made a capital gain, the first two conditions have been met.

Based on the information provided, you have calculated the value of the net assets of you, your spouse and the family trust as being less than the $6 million MNAV threshold. Accordingly, you satisfy the MNAV test.

As you satisfy all required basic conditions, you are automatically entitled to apply the 50% active asset reduction to your capital gain made from the disposal of the shares in the company.

You acquired X% of the shares in the company. The company runs a business and more than Y% of the company's assets are active assets. Therefore, the shares satisfy the active asset test.

The asset in question is the shares in the company. As you held X% of the shares, you have a small business participation percentage in the company of X%. Accordingly, you are a significant individual and consequently a CGT concession stakeholder in the company.

You have stated that you intend to make the choice to apply the retirement exemption and make a payment (up to $500,000) to CGT concession stakeholder, who is over 55 years of age, by the required date. Further, you satisfy all the basic conditions and the significant individual test, accordingly, you satisfy all the necessary conditions to be eligible to apply the retirement exemption.

The family trust sold units held in the unit trust. In order to access the small business concessions not only will the family trust have to satisfy the standard basic conditions, but also the additional basic condition or '90% test' set out in subsection 152-10(2) of the ITAA 1997.

To satisfy the 90% test, the CGT concession stakeholders in the unit trust (the object trust) together must have a small business participation percentage in the family trust of at least 90%. This condition has not been met. Therefore the family trust is not eligible to apply the small business concessions to the gain from the sale of the units.

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