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Edited version of your written advice
Authorisation Number: 1012950433099
Disclaimer
You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.
The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.
Date of advice: 2 February 2016
Ruling
Subject: Small Business Relief
Issue 1
Question 1
Will the sale of shares in a company satisfy the basic conditions for eligibility for the CGT small business relief and access to the small business 15 year exemption?
Answer
Yes
Question 2
Will the sale of shares in a different company satisfy the basic conditions for eligibility for the CGT small business relief and access to the small business 15 year exemption?
Answer
Yes
Issue 2
Question 1
Will proceeds from the sale of company property that is gifted to the family discretionary trust to form the corpus of the trust, be excluded from the trust's assessable income?
Answer
Yes
This ruling applies for the following periods:
1/7/20XX - 30/06/20YY
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The Taxpayer is a Shareholder in less than five private companies.
The Taxpayer is going to retire and sell X% of the shares in the companies in order to fund their retirement. The Taxpayer will sell the shares to a related person at market value.
The companies have been valued accordingly.
The companies are resident private companies and were incorporated in 19VV and 19WW.
The history of the Taxpayers shareholding in the companies was provided.
The significant individual test summaries were also provided.
The Taxpayer is a resident individual who is of retirement age. The Taxpayer's working hours have decreased over recent time.
The value of the Taxpayer's net assets prior to the sale of the shares is less than $6,000,000.
The Taxpayer is also selling some company property. The net proceeds from the sale of this property after provision for CGT will be gifted to (or settled on) a Family Discretionary Trust. This gifted money will form the corpus of the trust.
The trust has not yet been established nor have the trust deeds been drafted.
Relevant legislative provisions
Section 152-110 of the Income Tax Assessment Act 1997
Subdivision 152-A of the Income Tax Assessment Act 1997
Section 104-10 of the Income Tax Assessment Act 1997
Section 152-35 of the Income Tax Assessment Act 1997
Section 99B of the Income Tax Assessment Act 1936
Section 99B(2) of the Income Tax Assessment Act 1936
Reasons for decision
Issue 1
Question 1
Summary
The small business 15-year exemption will apply to the Taxpayer.
Detailed reasoning
A taxpayer may disregard a capital gain arising from a CGT event if the CGT asset was owned by the taxpayer for at least 15 years and satisfies the required additional conditions as set out in section 152-110 in the Income Tax Assessment Act 1997 (ITAA 1997).
Subsection 152-110(1) of the ITAA 1997 states that an entity that is a company or trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied: (a) The basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the capital gain.
(b) The entity continuously owned the CGT asset for the 15 year period ending just before the CGT event;
(c) The entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset;
(d) An individual who was a significant individual of the company or trust just before the CGT event either
(i) was 55 or over at that time and the event happened in connection with the individual's retirement; or
(ii) was permanently incapacitated at that time.
For the exemption to apply the basic conditions in Subdivision 152-A of the ITAA 1997, as outlined in subsection 152-10(1) of the ITAA 1997, need to be satisfied as outlined below.
(a) CGT event happens in relation to a CGT asset of yours 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 (see section 152-15);
(iii) 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;
(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 (see section 152-35)
Applying your circumstances to subsection 152-10(1) of the ITAA 1997:
(a) CGT event A1 under section 104-10 of the ITAA 1997 will happen when shares are sold.
(b) It is expected that the sale of shares will result in a significant capital gain.
(c) The Taxpayer satisfies the maximum net asset value test in section 152-15 of the ITAA 1997, by not exceeding the requisite $6,000,000 threshold.
(d) The Taxpayer's shares will satisfy the active asset test in section 152-35 of the ITAA 1997.
The condition at paragraph 152-110(1)(a) of the ITAA is satisfied.
It is therefore necessary to determine if all the other conditions in subsection 152-110(1) have been satisfied.
Paragraph 152-110(1)(b) of the ITAA 1997
As per the facts provided The Taxpayer has maintained significant shareholding of the asset at all times. This condition is satisfied.
Paragraph 152-110(1)(c) of the ITAA 1997
In accordance with section 152-55 of the ITAA 1997, an individual is a significant individual in a company or a trust at a time if, at that time, the individual has a small business participation percentage in the company or trust of at least Z%. The Taxpayer satisfies this requirement.
This condition is satisfied.
Paragraph 152-110(1)(d) of the ITAA 1997
The Taxpayer is of retirement age.
The Commissioner's view on the phrase "in connection with an individual's retirement" is outlined in the "Advanced guide to capital gains tax concessions for small business", and can be summarised as follows:-
• There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as retirement.
• It is necessary for there to be a permanent and everlasting retirement from the workforce.
• A CGT event may be in connection with an individual's retirement, if it occurred sometime before or after the retirement.
The Taxpayer's working hours and duties in the company have greatly reduced and the Taxpayer is intending to retire from the business.
This condition is satisfied.
It can be concluded that the Taxpayer can use the small business 15-year exemption under section 152-110 of the ITAA 1997 to disregard the capital gain that will arise when X% of the shares in the company are sold.
Question 2
Summary
The small business 15-year exemption will apply.
Detailed reasoning
The same provisions of the legislation as outlined in question 1 are relevant to this question.
Applying your circumstances to subsection 152-10(1) of the ITAA 1997:
(a) CGT event A1 under section 104-10 of the ITAA 1997 will happen when shares are sold.
(b) It is expected that the sale of shares will result in a significant capital gain.
(c) The Taxpayer will satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, by not exceeding the requisite $6,000,000 threshold.
(d) The Taxpayers shares will satisfy the active asset test in section 152-35 of the ITAA 1997 because as per the information provided.
The condition at paragraph 152-110(1)(a) of the ITAA is satisfied.
It is therefore necessary to determine if all the other conditions in subsection 152-110(1) have been satisfied.
Paragraph 152-110(1)(b) of the ITAA 1997
As per the facts provided the Taxpayer has maintained significant shareholding of the asset at all times. This condition is satisfied.
Paragraph 152-110(1)(c) of the ITAA 1997
In accordance with section 152-55 of the ITAA 1997, an individual is a significant individual in a company or a trust at a time if, at that time, the individual has a small business participation percentage in the company or trust of at least Z%.
The Taxpayer's direct small business participation percentage exceeds the required Z% and as a result is considered a significant individual.
This condition is satisfied.
Paragraph 152-110(1)(d) of the ITAA 1997
The Taxpayer is of retirement age.
The Commissioner's view on the phrase "in connection with an individual's retirement" is outlined in the "Advanced guide to capital gains tax concessions for small business", and can be summarised as follows:-
• There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as retirement.
• It is necessary for there to be a permanent and everlasting retirement from the workforce.
• A CGT event may be in connection with an individual's retirement, if it occurred sometime before or after the retirement.
The Taxpayer's working hours and duties in the company have greatly reduced and it the Taxpayer's intention is to retire from the business.
This condition is satisfied.
It can be concluded that the Taxpayer can use the small business 15-year exemption under section 152-110 of the ITAA 1997 to disregard the capital gain that will arise when X% of the shares in the company are sold.
Issue 2
Question 1
Summary
The corpus of the trust will not form part of the assessable income of the yet to be established family discretionary trust.
Detailed reasoning
The corpus of a trust is the sum of money or property that is set aside to produce income for the named beneficiaries of the trust. A trust will usually earn income from the money or property settled on the trust. The corpus may be used as an investment to earn further revenue, or as capital to fund a trading operation. This revenue becomes the trust's income as it is earned. The initial corpus of the trust is not income for tax purposes. Section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) operates to include in a taxpayers assessable income an amount of property of a trust estate that is paid to, or applied for the benefit of that taxpayer as a resident beneficiary. However section 99B(2) of ITAA 1936 provides that certain amounts are excluded from being assessable. This includes amounts that constitute the original corpus (capital) of the trust.
The proceeds that the Taxpayer will receive from the sale of the company property and after Capital Gains Tax (CGT) has been paid, which he or she intends to gift to (or settle on) a yet to be established family discretionary trust, will form the corpus of the trust and will not be included in the assessable income of the trust.
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