Edited version of your written advice

Authorisation Number: 1013074190321

Date of advice: 18 August 2016

Ruling

Subject: Capital gains tax

Question 1

Whether the majority underlying interests in the CGT assets of the Company changed in accordance with Subdivision 149-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The majority underlying interests in the CGT assets changed.

Question 2

Is the Company entitled to apply the CGT discount or the small business CGT concessions to the gain made on the sale of the land, the business and the assets?

Answer

The Company is not entitled to the CGT discount but it does qualify for the 15-year exemption in respect of CGT assets acquired (or deemed to be acquired) prior to 1 October 2000.

Question 3

Does CGT event G1 occur when the Company is liquidated?

Answer

No. CGT event C2 occurs when the Company is liquidated.

This ruling applies for the following periods:

Years ending 30 June 2016 and 2017

The scheme commences on:

1 July 2015

Relevant facts and circumstances

1. The Company was incorporated in late 19XX.

2. The Memorandum of Association for the Company states:

The capital of the Company is $XX,XXX divided into XX,XXX shares of $X.XX each with power to divide the shares in the original or any increased capital into several classes and to attach to the shares whether original or otherwise respectively any preferential qualified special or deferred rights privileges disabilities or conditions and to extinguish vary or modify such rights privileges disabilities or conditions or any of them.

3. The Memorandum of Association and the Articles of Association of the Company both state that Individual 1 and Individual 2 agreed to take 1 share each on incorporation.

4. Under a clause of the Articles of Association of the Company, the shares were divided into the following share classes:

Class	Numbered
X shares	0-1,000
X shares	1,001 - 2,000
X shares	2,001 - 3,000
X shares	3,001 - 4,000
X shares	4,001 - 5,000
X shares	5,001 - 6,000
X shares	6,001 - 7,000
X shares	7,001 - 8,000
X shares	8,001 - 9,000
X shares	9,001 - 10,000

5. Any issued share or shares may by special resolution be converted from one class to another class provided the holder of the share/s consents to the conversion.

6. Under a clause of the Articles of Association of the Company 'all shares shall be under the control of the Directors who may allot or otherwise dispose of the same to such persons on such terms and conditions and either a premium or par or (subject to the provision of the Act) at a discount and subject to special terms and conditions with special rights and privileges attached thereto and either with and subject to any fixed preferential or qualified right to dividends or to interest or in the distribution of the assets of the company and generally with and subject to such preferential or special rights privileges and conditions as the Directors think fit and with full power to give any person the call of any shares whether at par or at a premium during such time and for such consideration as the Directors think fit.'

7. A clause of the Articles of Association of the Company addresses the votes of members and states:

On a show of hands every member present in person or by attorney shall have one vote. In case of a poll, each member shall have one vote for each share held by them.

8. A clause of the Articles of Association states the following in relation to dividends:

Subject to the right of the holders of the shares issued with special or preferential rights attached thereto or issued upon special conditions, the Directors may from time to time declare dividends (whether interim or otherwise) to be paid to members. Any such dividend may be declared and paid on the shares of any one or more class or classes to the exclusion of the shares of any other class or classes and if at any meeting dividends are declared on shares belonging to more than one class the dividend declared on the shares of any such class may be at a higher or lower rate than or at the same rate as the dividend declared on the shares of the other or others of such classes.

Subject to the provisions of the last preceding paragraph and unless the resolution declaring the dividend shall otherwise provide all classes of shares rank pari passu for dividends.

9. The Company does not have any records indicating the details of share allotments prior to 19XX however their tax agent has attempted to reconstruct the details from Annual Returns lodged with ASIC as follows:

a. The original share issued to Individual 1 was an X class share and the original share issued to Individual 2 was an X class share.

b. In early 19XX, XX A class shares were issued to Individual 1 and XX B class shares were issued to Individual 2.

c. In early 19XX, an E class share was issued to Individual 3 and an F class share was issued to Individual 4.

d. In mid 19XX, XX C class shares were issued to Taxpayer 1, X D class shares were issued to Individual 5, an E class share was transferred to Individual 3, an F class share was transferred to Individual 4, XX G class shares were issued to Taxpayer 2 and X H class shares were issued to Individual 6. The shares transferred to Individual 3 and Individual 4 were the original shares issued to Individual 1 and Individual 2 on incorporation. These shares were 'reclassified' from A and B class shares to E and F class shares respectively.

e. The share holdings immediately before 20 September 1985 were XX A class shares held by Individual 1; XX B class shares held by Individual 2; XX C class shares held by Taxpayer 1; XX G class shares held by Taxpayer 2; X D class shares held by Individual 5; X H class shares held by Individual 6; X E class shares held by Individual 3 and X F class shares issued to Individual 4.

f. In early 19XX, Individual 2 passed away. The shares that they held were transferred to Individual 1 so as at the date of death, the shareholdings were the same as set out in (e) above however Individual 1 held XX A class and XX B class shares.

g. In mid 19XX, Individual 1 passed away. The shares that they held were transferred equally to Taxpayer 1 and Individual 5. As at Individual 1's date of death, the shareholdings were XX A class, XX B class and XX C class shares held by Taxpayer 1; XX G class shares held by Taxpayer 2; XX A class, XX B class and X D class shares held by Individual 5; X H class shares held by Individual 6; X E class shares held by Individual 3; and X F class shares held by Individual 4.

h. In mid 19XX, Taxpayer 1 and Taxpayer 2 bought all of Individual 6's H class shares.

i. In mid 19XX, Taxpayer 1 and Taxpayer 2 bought all of Individual 5's A, B and D class shares.

j. In mid 19XX, Taxpayer 1 and Taxpayer 2 bought Individual 3's E class shares and Individual 4's F class shares. In mid 19XX, Taxpayer 1 held XX of the XX issued shares and Taxpayer 2 held the remaining XX issued shares.

k. In late 20XX, all of the shares were converted to A class shares. From this date, Taxpayer 1 held XX A class shares and Taxpayer 2 held XX A class shares.

l. In late 20XX, Taxpayer 2 passed away. The XX A class shares they held are now held by the Estate of Taxpayer 2.

10. In late 19XX, the Company paid a dividend.

11. In mid 19XX, it was recommended that a dividend be paid to the shareholders of the Company but no dividend was paid.

12. In mid 19XX, the Company paid a dividend.

13. The Company owned and managed a business and provided various types of short term accommodation.

14. No long term tenants resided at the premises and guests were not required to enter into accommodation agreements.

15. The business was managed by Taxpayer 1 and Taxpayer 2 working on average XX hours a week.

16. The Company has been actively seeking a buyer for the business for the last X years.

17. The Company has associates and affiliates.

18. The Company has active assets.

19. The Company has an interest in the partnership. The partnership has been included as an active asset. The partnership has active assets. The partnership's businesses were progressively sold over the last X years as part of Taxpayer 1 and Taxpayer 2's retirement strategy. The last business owned by the partnership was sold during the year ended 30 June 20XX.

20. In late 20XX, the Company entered into X separate contracts for the sale of the business and its assets and for the land owned by the Company. The settlement date was late 20XX. Prior to signing the contracts, a lease relating to the grounds was granted by the Company to the prospective purchaser of the assets of the business.

21. The contract for the sale of the land was subject to the contract for the sale of the assets of the business as well as the Put and Call Option.

22. The Put and Call Option is defined in the contract for the sale of the land as:

Means the put and call option deed entered into on or about the date of the Agreement, between the Purchaser and Taxpayer 1 and Taxpayer 2 for the land.

23. The assets of the business include:

• the Goodwill;

• the Permits;

• the Plant and Equipment;

• the Records;

• the Intellectual Property Rights; and

• the Site Agreements;

but excludes the Excluded Assets (the book debts; any items of personal property belonging to Employees; any items of personal property or improvements on the Land belonging to Tenants; the benefit of the Service Contracts; and anything which is being transferred to the Purchaser under the Land Contract.)

24. Taxpayer 1 and Taxpayer 2 managed the business until the settlement date.

25. After settlement, Taxpayer 1 no longer engaged in any activities relating to the management of the group's remaining business. At this time Taxpayer 1 considered themselves retired and were over 55 years old.

26. Taxpayer 2 was over 55 years old when the Company was sold. Taxpayer 2 intended to spend no more than X hours per week supervising management of the remaining business until a buyer was found.

27. In early 20XX Taxpayer 2 passed away and the day to day management of the remaining business was left to the employees.

28. Taxpayer 1 and Taxpayer 2 as the only shareholders of the Company intended to place the Company into voluntary liquidation as soon as possible.

29. The Company's part ownership of a land will be purchased by Taxpayer 1.

30. The Company satisfies the basic conditions for small business relief under Division 152-A of the ITAA 1997.

Relevant legislative provisions

Subdivision 149-B of the Income Tax Assessment Act 1997

Division 152 of the Income Tax Assessment Act 1997

Section 104-25 of the Income Tax Assessment Act 1997

Reasons for decision

Summary

The majority underlying interests in the Company changed in mid 19XX when Taxpayer 1 and Taxpayer 2 purchased the shares owned by Individual 3 and Individual 4. At this point in time, the ultimate owners who held the majority underlying interests in the assets prior to 20 September 1985 no longer held more than XX% of the beneficial interests in the assets and ordinary income of the Company. As such, any pre-CGT assets owned by the Company as at mid 19XX ceased being pre-CGT assets and were taken to be purchased at that time for CGT purposes.

The CGT discount is not available to companies and therefore it cannot be claimed by the Company. However, the Company meets the 15-year exemption for assets that were acquired (or that were deemed to be acquired) prior to 1 October 2000. As such, the Company is entitled to disregard the capital gain made on any such assets (excluding depreciating assets).

CGT event C2 will occur when the Company is liquidated. However, any capital gain that arises in relation to the pre-CGT shares owned by Taxpayer 1 and the Estate of Taxpayer 2 will be disregarded.

Detailed reasoning

Pre-CGT Assets

1. A taxpayer makes a capital gain or loss if a CGT event happens. Most CGT events involve a CGT asset. However, for many CGT events there is an exception if the CGT asset was acquired before 20 September 1985.

2. A CGT asset is defined in section 108-5(1) of the ITAA 1997 as any kind of property or a legal or equitable right that is not property. Subsection 108-5(2) of the ITAA 1997 states:

To avoid doubt, these are CGT assets:

(a) Part of, or an interest in, an asset referred to in subsection (1);

(b) Goodwill or an interest in it;

(c) An interest in an asset of a partnership;

(d) An interest in a partnership that is not covered by paragraph (c).

3. Under section 149-10 of the ITAA 1997, a CGT asset that an entity owns is a pre-CGT asset if, and only if, the entity last acquired the asset before 20 September 1985; and the entity was not, immediately before the start of the 1998-99 income year, taken under former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA 1936) or Subdivision C of Division 20 of former Part IIIA of the ITAA 1936 to have acquired the asset on or after 20 September 1985; and the asset has not stopped being a pre-CGT asset of the entity because of Division 149 of the ITAA 1997.

4. The asset of a non-public entity stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. Part 3-1 and Part 3-3 (apart from Division 149) of the ITAA 1997 also apply to the asset as if the entity had acquired it at that earliest time (subsection 149-30(1) and (1A) of the ITAA 1997). However, if the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before a particular time majority underlying interests in the asset were held by the same ultimate owners who held majority underlying interests in the asset immediately before that day, the asset continues to be a pre-CGT asset (subsection 149-30(2) of the ITAA 1997).

5. Where the underlying interests of a person pass by reason of that person's death to another natural person, the operation of subsection 149-30(1) is modified in that the percentage of underlying interests held by the deceased is deemed to have been held by the person to whom they pass for the period the deceased held those shares (subsection 149-30(3) and 149-30(4) of the ITAA 1997).

6. Majority underlying interest, underlying interest and ultimate owner are defined in subsection 149-15(1), (2) and (3) respectively as follows:

(1) Majority underlying interests in a *CGT asset consist of:

(a) more than 50% of the beneficial interests that *ultimate owners have (whether directly or *indirectly) in the asset; and

(b) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

(2) An underlying interest in a *CGT asset is a beneficial interest that an *ultimate owner has (whether directly or *indirectly) in the asset or in any *ordinary income that may be *derived from the asset.

(3) An ultimate owner is:

(a) an individual; or

(b) a company whose *constitution prevents it from making any distribution, whether in money, property or otherwise, to its members; or

(c) the Commonwealth, a State or a Territory; or

(d) a municipal corporation; or

(e) the government of a foreign country, or of part of a foreign country.

7. An ultimate owner indirectly has a beneficial interest in a CGT asset or another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital, a dividend or income of the entity if the other entity were to distribute any of its capital, dividend or income and the capital, dividend or income were then successively distributed by each entity interposed between the other entity and the ultimate owner (subsection 149-15(4) and 149-15(5) of the ITAA 1997).

8. The expression 'beneficial interests' as used in the definition of 'majority underlying interests' is not defined. In general law, a shareholder does not have any legal or equitable interest in the assets of a company so it would be difficult to see how an asset of a company can satisfy the 'majority underlying interests' test and remain a pre-CGT asset.

9. Paragraph 1 and 2 of Taxation Ruling IT 2340 Income Tax: Capital Gains: Deemed Acquisition of Assets by a Taxpayer after 19 September 1985 where a Change Occurs in the Underlying Ownership of Assets Acquired by the Taxpayer on or Before that Date (IT 2340) provide some guidance regarding section 160ZZS of the ITAA 1936 (which applied to years prior to the 1998-99 year of income) and the terms 'underlying interest' and 'majority underlying interest'. Paragraph 1 and 2 of the Ruling state:

Section 160ZZS of the Income Tax Assessment Act 1936 (the Act) is one of two general anti-avoidance provisions aimed at preventing circumvention of the limitation of the tax on capital gains to assets acquired after 19 September 1985. It applies where a taxpayer (for example, a company) has acquired assets prior to 20 September 1985 and on or after that date there is a change of 50 per cent or more in the underlying ownership of the assets (in the case of a company, a change of 50 per cent or more in the beneficial ownership of the company's shares). Where such a change occurs the provision operates to deem the assets to have been acquired after 19 September 1985 so that any subsequent real capital gain on the assets will fall within the tax base.

The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like other provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets.

10. Applying the 'look through' approach, a shareholder is treated as having a beneficial interest in the company's assets. This approach is supported by AAT Case 7529 (1991) 22 ATR 3532, Case Y59 91 ATC 502.

11. In this case, the shareholders of the Company are treated as having beneficial interests in the assets of the company and would be the 'ultimate owners' of the assets. These interests, in the assets and in the income derived from the assets, are represented by shareholdings.

12. As at 19 September 1985 and up to 16 February 19XX, the shareholdings in the Company were:

• XX A class shares held by Individual 1;

• XX B class shares held by Individual 2;

• XX C class shares held by Taxpayer 1;

• XX G class shares held by Taxpayer 2;

• X D class shares held by Individual 5;

• X H class shares held by Individual 6;

• X E class shares held by Individual 3; and

• X F class shares issued to Individual 4.

13. As all of the shares had equal voting and dividend rights, the ultimate owners of the underlying interests in the assets of the company were held by Individual 1, Individual 2, Taxpayer 1, Taxpayer 2, Individual 5, Individual 6, Individual 3 and Individual 4 up until early 19XX.

14. In early 19XX, Individual 2 passed away. On their death, the B class shares that they held were transferred to Individual 1. Therefore, as at early 19XX, the shareholdings were the same as set out in paragraph 12 except that Individual 2 no longer held any shares and Individual 1 held XX A class and XX B class shares. However, by virtue of subsections 149-30(3) and (4) of the ITAA 1997, the percentage of underlying interests held by Individual 2 is deemed to have been held by Individual 1 for the period that Individual 2 held the shares. As such, there is no change in the ultimate owners of the underlying interest of the company on the death of Individual 2.

15. In mid 19XX, Individual 1 passed away. On their death, the A class and B class shares that they held were transferred in equal proportions to Taxpayer 1 and Individual 5. Under subsection 149-30(3) and 149-30(4) of the ITAA 1997, the percentage of underlying interests held by Individual 1 is deemed to be held by Taxpayer 1 and Individual 5 for the period that Individual 1 held the shares. As at mid 19XX, the shareholdings were:

• XX A class, XX B class and XX C class shares held by Taxpayer 1;

• XX G class shares held by Taxpayer 2;

• XX A class, XX B class and X D class shares held by Individual 5;

• X H class shares held by Individual 6;

• X E class shares held by Individual 3; and

• X F class shares held by Individual 4.

16. As Taxpayer 1 and Individual 5 are deemed to have held Individual 1's underlying interest for the period that Individual 1 held the shares, there is no change in ultimate owners of the underlying interests of the Company. The shareholders listed at paragraph 15 are therefore taken to be the ultimate owners with a majority underlying interest immediately before 20 September 1985 ('the ultimate owners').

17. In mid 19XX, Taxpayer 1 and Taxpayer 2 bought all of Individual 6's H class shares. These shares become post-CGT shares in the hands of Taxpayer 1 and Taxpayer 2 and as at this date, the ultimate owners owned XX% (XX shares/ XX shares) of the pre-CGT shares of the Company. Although the underlying interests in the Company changed as at this date, the ultimate owners who had majority underlying interests in the assets of the Company immediately before 20 September 1985, do not cease holding a majority underlying interest in the pre-CGT shares i.e. they still hold more than a XX% beneficial interest.

18. In mid 19XX, Taxpayer 1 and Taxpayer 2 bought all of Individual 5's A, B and D class shares. These shares, like the shares purchased from Individual 6, become post-CGT shares in the hands of Taxpayer 1 and Taxpayer 2. As at this date, the ultimate owners own XX% (XX shares/XX shares) of the pre-CGT shares of the Company. As such, there is no change in the majority underlying interests at this point in time as the ultimate owners still own more than XX% of beneficial interests in the pre-CGT assets of the Company.

19. In mid 19XX, Taxpayer 1 and Taxpayer 2 bought Individual 3's E class shares and Individual 4's class shares. These shares become post-CGT shares in the hands of Taxpayer 1 and Taxpayer 2. Although Taxpayer 1 and Taxpayer 2 hold XXX% of the beneficial interest in the assets of the Company after the purchase Individual 3 and Individual 4's shares, they did not hold a majority underlying interest (more than XX%) immediately before 20 September 1985. Immediately before 20 September 1985 their shareholding amounted to XX% and, even with the addition of the pre-CGT shares inherited from Individual 2 and Individual 1, their shareholding only amounted to XX%. As such, the ultimate owners cease to hold more than XX% of the pre-CGT shares in the Company as this date.

20. After the purchase of Individual 3 and Individual 4's shares, Taxpayer 1 held XX pre-CGT shares (XX A class and XXB class shares transferred to them on the death of Individual 1 (some of which were transferred to them on the death of Individual 2); and XX C class shares issued to them in mid 19XX) and XX post-CGT shares (X H class shares purchased from Individual 6; X A class shares, X B class shares and X D class shares purchased from Individual 5; X E class share purchased from Individual 3; and X F class share purchased from Individual 4). Taxpayer 2 held XX pre-CGT shares (XX G class shares issued to them in mid 19XX) and XX post-CGT shares (X H class shares purchased from Individual 6; X A class shares, X B class shares and X D class shares purchased from Individual 5; X E class share purchased from Individual 3; and X F class share purchased from Individual 4).

21. As majority underlying interests in the assets were no longer held by the ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985, the pre-CGT assets stop being pre-CGT assets at this date mid 19XX.

22. Accordingly, under subsection 149-30(1A) of the ITAA 1997, the Company is taken to have acquired any pre-CGT assets for market value in mid 19XX.

Small Business Capital Gains Tax Concessions

23. CGT event A1 happens if a taxpayer disposes of a CGT asset. A CGT asset is disposed of if a change of ownership occurs from the taxpayer to another entity whether because of some act or event or by operation of law. However, a change of ownerships does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

24. In late 20XX, the Company disposed of its business, the assets of the business and the land used by the business under X separate contracts. Accordingly, CGT event A1 has occurred.

25. Division 152 of the ITAA 1997 sets out the CGT concessions that may be available to small business taxpayers to reduce a capital gain that arises from a CGT event that happened after 11.45am on 21 September 1999 (such as the disposal of a CGT asset). The four concessions are the 15-year exemption (subdivision 152-B), the 50% active asset reduction (subdivision 152-C), the retirement exemption (subdivision 152-D), and the roll-over (subdivision 152-E).

26. Small business taxpayers may also be entitled to reduce their capital gain by applying the CGT discount. However, the CGT discount cannot be used by companies. It can only be applied by an individual (including the beneficiary of a trust) and capital losses are offset against capital gains before the CGT discount is applied. The CGT discount is applied before the small business CGT concessions apart from the 15-year exemption because if that test applies, the whole capital gain is exempted.

27. As the Company is a company, it will not be entitled to apply the CGT discount. However, it may be entitled to apply the small business CGT concessions.

28. In order to access the concessions in Division 152 of the ITAA 1997, small business taxpayers have to satisfy the basic conditions in Subdivision 152-A of the ITAA 1997. The basic conditions in Subdivision 152-A of the ITAA 1997 have been met. As such, it is only necessary to consider whether any of the particular concessions can be used to reduce any capital gain arising from the disposal of the business, its assets and the land used to carry on the business.

29. Under subsection 152-110(1) of the ITAA 1997 a company is entitled to apply the 15-year exemption and disregard any capital gain arising from a CGT if the following conditions are met:

• The basic conditions in Subdivision 152-A are satisfied for the gain;

• The entity continuously owned the CGT asset for the 15-year period ending just before the CGT event;

• 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;

• An individual who was a significant individual of the company or trust just before the CGT event either:

(a) was 55 or over at that time and the event happened in connection with the individual's retirement; or

(b) was permanently incapacitated at that time.

30. No information has been provided by the Rulee about how long the assets being sold have been held by the Company however any assets acquired (or deemed to be acquired) before 1 October 2000, will satisfy this test (e.g. goodwill). Therefore, if the assets that are being sold were purchased on or around the time the business commenced then the Company will have owned the asset for a 15-year period ending just before the CGT event.

31. The Company will not be entitled to apply the 15-year exemption in relation to any CGT assets acquired (or deemed to be acquired) on or after 1 October 2015.

32. An individual is a significant individual in a company at a time if, at that time, the individual has a small business participation percentage in the company of at least XX% (section 152-55 of the ITAA 1997). Small business participation percentage is defined 152-65 of the ITAA 1997 as:

An entity's small business participation percentage in another entity at a time is the percentage that is the sum of:

(a) the entity's direct small business participation percentage in the other entity at that time; and

(b) the entity's indirect small business participation percentage in the other entity at that time.

33. An entity's direct small business participation percentage is the percentage of the voting power in the company, the percentage of any dividend that the company may pay or the percentage of any distribution of capital that the company may make that the entity has because of holding the legal and equitable interest in shares in the company. If those percentages are different, the direct small business participation percentage is the smaller or the smallest (item 1 in the table in subsection 152-70(1) of the ITAA 1997).

34. Just before the CGT event occurs, Taxpayer 1 owns XX of the XX issued shares in the Company and Taxpayer 2 owns XXof the XX issued shares in the Company. However, the company has to have an individual that has a small business participation percentage of at least XX% for at least 15 years. That individual does not have to be same individual and the 15 years does not have to be continuous. Although the company has issued different classes of shares, all of the shares carry the same voting and dividend rights.

35. From late 19XX to early 19XX, Individual 1 and Individual 2 held more than XX% each of the shares. From early 19XX to mid 19XX, Individual 1 held more than XX% of the shares. From mid 19XX to mid 19XX, Taxpayer 1 and Individual 5 held more than XX% each of the shares and from mid 19XX onwards, Taxpayer 1 and Taxpayer 2 held more than XX% each of the shares. Therefore, since the Company commenced, there has been at least one (but generally X) shareholders who hold at least XX% of the shares. Accordingly, the Company has had a significant individual for at least 15 years.

36. The last step in considering whether the Company qualifies for the 15-year exemption, it is to determine whether the significant individuals of the Company just before the CGT event (Taxpayer 1 and Taxpayer 2) were over 55 at the time the event occurred and whether the CGT event happened in connection with their retirement.

37. Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. 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 a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

38. As at late 20XX, Taxpayer 1 and Taxpayer 2 were over 55 years old. As such, both of the significant individuals were over 55 at the time the business, assets and land owned by the Company were sold. After the sale, Taxpayer 1 no longer engaged in any activities relating to the management of the group's remaining and Taxpayer 2 intended to spend no more than X hours per week supervising the management of that business until a buyer could be found. As it turned out, the contracts for the sale of the business, assets and land of the Company settled late 20XX and Taxpayer 2 passed away late 20XX.

39. As Taxpayer 1 ceased working once the Company was sold, it is considered that the sale of the Company's business was in connection with her retirement. After the sale of the Company's business Taxpayer 2 intended to reduce their working hours to X hours per week and in fact, they passed away shortly after it was sold. As such, it is considered that the sale of the Company's business was also in connection with Taxpayer 2's retirement.

40. Accordingly, any ordinary or statutory income derived from CGT event A1 occurring when the assets, business and land of the Company were sold (that have been held for at least 15 years), will be treated as neither assessable income nor exempt income in accordance with subsection 152-110(2) of the ITAA 1997.

41. However, subsection 152-110(2) of the ITAA 1997 doesn't apply to income derived by a company as a result of a balancing adjustment event occurring to a depreciating asset whose decline in value is worked out under Division 40 of the ITAA 1997 or deductions for which are calculated under Division 328 of the ITAA 1997 (subsection 152-110(3) of the ITAA 1997). Some of the assets sold are considered to be depreciating assets (e.g. plant and equipment) so balancing charges will have be calculated for those assets as a result of the balancing adjustment event that occurs i.e. when the assets are sold. Therefore, any assessable amounts arising as a result of balancing adjustment events will not be treated as non-assessable non-exempt income under subsection 152-110(2) of the ITAA 1997.

42. Subsection 152-125 of the ITAA 1997 states:

(1) This section applies if

(a) one or more of the following apply:

(i) under section 152-110, a capital gain (the exempt amount) of a company or trust is disregarded;

(ii) under section 152-110, an amount of income (the exempt income) is non-assessable non-exempt income of a company or trust;

(iii) subparagraph (i) of this paragraph would have applied to an amount (the exempt amount) except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985;

(iv) subparagraph (i) of this paragraph would have applied to an amount (the exempt amount) if subsection 149-30(1A) and section 149-35 had not applied to the relevant asset; and

(b) the company or trust make one or more payments (whether directly or indirectly through one or more interposed entities) in relation to the exempt amount within 2 years after the relevant CGT event to an individual who was a CGT concession stakeholder of the company or trust just before the event.

(2) In determining the taxable income of the company, the trust, the individual, or any of the interposed entities, disregard the total amount of the payment or payments made to the CGT concession stakeholder, up to the following limit:

Stakeholder's participation x Exempt amount

percentage

where:

stakeholder's participation percentage means:

(a) in the case of a company or a trust referred to in item 2 of the table in subsection 152-70(1) - the stakeholder's small business participation percentage in the company or trust just before the relevant CGT event; or

(b) in the case of a trust referred to in item 3 of that table - the amount (expressed as a percentage) worked out using the following formula:

100

_______________________

Number of CGT concession

stakeholders of the trust just

before the CGT event

(3) If a company makes such a payment, this Act applies to the payment, to the extent that it is less than or equal to the limit mentioned in subsection (2), as if:

(a) it were not a dividend; and

(b) it were not a frankable distribution.

(4) The Commissioner may extend the time limit under paragraph (1)(b).

43. Therefore, any payment made to Taxpayer 1 or the Estate of Taxpayer 2 by the Company within 2 years of the CGT event occurring will not be treated as a dividend or frankable distribution if the amount paid to Taxpayer 1 is less than 62.5% of the exempt amount and the amount paid to the Estate of Taxpayer 2 is less than 37.5% of the exempt amount.

44. As any capital gain that arises from the sale of the CGT assets of the Company (apart from the depreciating assets) that have been held for at least 15 years is neither assessable income nor exempt income under subsection 152-110 of the ITAA 1997, no further consideration of the small business CGT concessions is required in respect of those assets.

45. However, as the 15-year exemption will only apply to those CGT assets acquired (or deemed to have been acquired) before 1 October 2000 it is necessary to consider the other small business concessions in relation to these CGT assets. Based on the facts provided, the Company will not be entitled to apply the small business retirement exemption as any capital gain made is not being contributed to a complying superannuation fund. The small business roll-over also will not apply as no replacement assets have been acquired. However, as the Company meets the basic conditions in subdivision 152-A of the ITAA 1997, the small business 50% active asset reduction may be used to reduce any capital gains made in respect of any CGT assets (excluding depreciating assets) that were purchased after 1 October 2000.

CGT Event G1

46. Under subsection 104-135(1) of the ITAA 1997, CGT event G1 happens if:

(a) a company makes a payment to you in respect of a share you own in the company (except for CGT even A1 or C2 happening in relation to the share); and

(b) some or all of the payment (the non-assessable part) is not a dividend, or an amount that is taken to be a dividend under section 47 of the ITAA 1936; and

(c) the payment is not included in your assessable income.

The payment can include giving property (see section 103-5).

47. As stated above, CGT event A1 occurs when a CGT asset is disposed of. CGT event C2 occurs when a taxpayer's ownership in a tangible asset ends by the asset being redeemed or cancelled; being released, discharged or satisfied; or expiring; or being abandoned, surrendered or forfeited; or if the asset is an option - being exercised; or if the asset is a convertible interest - being converted. CGT event C2 generally occurs to the member's shares when a company is wound up voluntarily.

48. The time of CGT event G1 is when the company makes the payment (subsection 104-135(2) and the taxpayer makes a capital gain if the amount of the non-assessable part is more than the share's cost base. If the taxpayer makes a capital gain, the share's cost base and reduced cost base are reduced to nil (subsection 104-135(3) of the ITAA 1997). However, if the non-assessable part is not more than the share's cost base, that cost base and its reduced cost base are reduced by the amount of the non-assessable part.

49. However:

• under subsection 104-135(5) of the ITAA 1997, a capital gain is disregarded if you acquired the CGT asset that is the share before 20 September 1985;

• under subsection 104-135(6) of the ITAA 1997, a payment by a liquidator is disregarded for the purposes of section 104-135 of the ITAA 1997 if the company ceases with 18 months of the payment; and

• under subsection 104-135(6) of the ITAA 1997, a payment that is personal services income included in a taxpayer's assessable income, or another entity's assessable income, under section 86-15 is disregarded.

50. In working out the non-assessable part, a taxpayer disregards any part of the payment that is non-assessable non-exempt income; repaid by the taxpayer; compensation the taxpayer paid that can reasonably be regarded as a payment of all or part of the payment; or an amount referred to in section 152-125 (which exempts a payment of a small business 15-year exemption amount) as an exempt amount (subsection 104-135(2) of the ITAA 1997).

51. As stated at paragraph 89 above, if the Company makes a payment equating to 67.5% of the 'exempt amount' to Taxpayer 1 or 37.5% of the 'exempt amount' to the Estate of Taxpayer 2 within 2 years of the business, its assets and the land it owns being sold (i.e. before 21 October 2017) it will not be treated as a dividend. However, subsection 104-134(2) of the ITAA 1997, ensures that a payment disregarded under the 15-year exemption will have no other tax consequences and will not cause CGT event G1 to happen.

52. If the Company makes a payment of the non-exempt amount (the amount relating to the balancing charge adjustments) to Taxpayer 1 or the Estate of Taxpayer 2 then CGT event G1 could potentially apply. However, there is no indication that such a payment will be made and if it was, any capital gain in respect of the pre-CGT shares held by Taxpayer 1 (XX shares) and the Estate of Taxpayer 2 (XX shares) would be disregarded. The whole amount of any capital gain would also be disregarded if the payment was made by a liquidator and the company ceased within 18 months of the payment being made which could potentially occur.

53. When the Company is put into voluntary liquidation, CGT event C2 will occur.

54. Paragraph 1 of Taxation Determination TD 2001/27 Income tax: capital gains: how do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 ('ITAA 1997') treat: (a) a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the Income Tax Assessment Act 1936 ('ITAA 1936') to be a dividend; and (b) an interim liquidation distribution to the extent it is not deemed to be a dividend by subsection 47(1)? states that 'the full amount of a final distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company for the purposes of capital gains or capital losses made on the happening of CGT event C2 (about cancellation, surrender and similar endings) in section 104-25 of the ITAA 1997. After the winding-up of a company, CGT event C2 happens to the shares when the company ceases to exist in accordance with the Corporations Act 2001 (see Taxation Determination TD 2000/7 paragraphs 3 and 4).'

55. If all or part of a final distribution made by a liquidator of a company is deemed by subsection 47(1) of the ITAA 1936 to be a dividend paid out of profits, and to be assessable income of a shareholder in the company under subsection 44(1) of the ITAA 1936, this does not alter the position stated in paragraph 1 of TD 2001/27 (set out at paragraph 100).

56. The apportionment rule in subsection 116-40(2) of the ITAA 1997 does not apply. The capital proceeds for the ending of the shares are not limited to the portion of the distribution that is not assessable under subsection 44(1) of the ITAA 1936 (paragraph 4 of TD 2001/27).

57. However, subsection 118-20(1) of the ITAA 1997, when read with subsection 118-20(1A) of the ITAA 1997, ensures that no part of the final liquidator's distribution is taxed both as a dividend and as a capital gain.

58. Under subsection 104-25(2) of the ITAA 1997, the time of CGT event C2 is when the taxpayer enters into the contract that results in the asset ending; or if there is no contract, such as this case, when the asset ends. Paragraph 4 of TD 2000/7 Income tax: capital gains: when does a CGT event happen to shares in a company, for the purposes of Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997, if the company is deregistered under the Corporations Law? states that 'if a company is wound up voluntarily, it is deregistered three months after the liquidator lodges a return of the holding of the final meeting of members or of members and creditors (subsection 509(5) of the C Law) or on such other date as a Court, by order, specifies (subsection 509(6) of the C Law). A CGT event (usually CGT event C2 in section 104-25 of the 1997 Act) happens to the members' shares for the purposes of Parts 3-1 and 3-3 of the 1997 Act, either 3 months after the return is lodged or on the date specified in the Court order, subsections 509(5) and (6).'

59. A taxpayer makes a capital gain if the capital proceeds from the ending of the asset are more than the asset's cost base. A capital loss is made if the capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) of the ITAA 1997). Any capital gain or capital loss is disregarded if the taxpayer acquired the asset before 20 September 1985.

60. Therefore, when the Company is liquidated, CGT event C2 will occur either 3 months after the liquidator lodges a return of the holding of the final meeting of members or on such date as a Court, by order, specifies. However, any capital gain or loss that arises in relation to the pre-CGT shares held by Taxpayer 1 and the Estate of Taxpayer 2 will be disregarded. A capital gain or loss will only arise in relation to the ending of the post-CGT shares.

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