Edited version of your written advice

Authorisation Number: 1013100853399

Date of advice: 6 October 2016

Ruling

Subject: Capital gain tax Concessions and the Maximum Net Asset Value Test

Question 1

Does the Commissioner agree that Trust A made a capital gain from the capital gain tax (CGT) event happening in relation to Trust A's interest in Partnership A's goodwill?

Answer

Yes.

Question 2

Does the Commissioner agree that no Specified Entity (Class A) or Specified Entity (Class B) was an "affiliate" (within the meaning contained in section 328-130) of Trust A just before the CGT event?

Answer

Yes.

Question 3

Does the Commissioner agree that each Specified Entity (Class A) was "connected with" (within the meaning contained in section 328-125) Trust A just before the CGT event?

Answer

Yes.

Question 4

Does the Commissioner agree that no Specified Entity (Class B) was "connected with" (within the meaning contained in section 328-125) Trust A just before the CGT event?

Answer

Yes.

Question 5

Does the Commissioner agree that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20) of Trust A just before the CGT event is correct?

Answer

Yes.

Question 6

Does the Commissioner agree that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20) of Partnership A just before the CGT event is correct?

Answer

Yes.

Question 7

Does the Commissioner agree that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20) of Company B just before the CGT event is correct?

Answer

Yes.

Question 8

Does the Commissioner agree that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20) of Individual A just before the CGT event is correct?

Answer

Yes.

Question 9

Does the Commissioner agree that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20) of Company A just before the CGT event is correct?

Answer

Yes.

Question 10

Does the Commissioner agree that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20) of Trust B just before the CGT event is correct?

Answer

Yes.

Question 11

Does the Commissioner agree that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20) of Unit Trust C just before the CGT event is correct?

Answer

Yes.

Question 12

Does the Commissioner agree that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20) of Unit Trust B just before the CGT event is correct?

Answer

Yes.

Question 13

Does the Commissioner agree that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20) of Partnership B just before the CGT event is correct?

Answer

Yes.

Question 14

Does the Commissioner agree that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20) of Trust C just before the CGT event is correct?

Answer

Yes.

Question 15

Does the Commissioner agree that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20) of Trust E just before the CGT event is correct?

Answer

Yes.

Question 16

Does the Commissioner agree that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20) of Company C just before the CGT event is correct?

Answer

Yes.

Question 17

Does the Commissioner agree that Trust A satisfied the maximum net asset value test (MNAV test) (in sections 152-15 and 152-20) for the capital gain?

Answer

Yes.

Question 18

Does the Commissioner agree that Partnership A's goodwill satisfied the active assets test in section 152-35 for the capital gain?

Answer

Yes.

Question 19

Does the Commissioner agree that the basic conditions contained in subsection 152-10(1) were satisfied for the capital gain?

Answer

Yes.

Question 20

Does the Commissioner agree that Trust A can choose to disregard all or part of the capital gain by applying the small business 15 year exemption in Subdivision 152-B?

Answer

Yes.

Question 21

Assuming the answer to question 20 is favourable (ie answered "yes"), and Trust A chooses to apply the small business 15 year exemption in Subdivision 152-B to disregard the entire capital gain, does the Commissioner agree that Trust A's net capital gain for the 20XX income year, worked out under subsection 102-5(1), will be nil (assuming that this was the only capital gain made by Trust A for the 20XX income year)?

Answer

Yes.

Question 22

Does the Commissioner agree that if Trust A makes one or more payments (whether directly or indirectly through one or more interposed entities) in relation to the 15 year exemption amount (within two years of the CGT event) to Individual A, in determining the taxable income of Trust A, Individual A or any of the interposed entities, the total amount of such payment or payments made to Individual A can be disregarded?

Answer

Yes.

This ruling applies for the following periods:

01 July 20WW - 30 June 20ZZ

The scheme commences on:

01 July 20WW

Relevant facts and circumstances

1. The relevant entities are as follows:

(a) Trust A

i. The trust is a discretionary trust established by deed.

ii. The trustee is Company A.

iii. Individual A is the appointer and guardian.

iv. Trust A has an X% interest in Partnership A.

(b) Unit Trust A

i. The trustee is a Company A.

ii. The sole unit holder is the Superannuation Fund.

iii. Unit Trust A has a X% interest in Partnership A.

(c) The Partnership A

i. The partnership is carried on between Unit Trust A and Trust A.

ii. Partnership A has carried on a business since the mid 1990's.

(d) Company A

i. This company is a propriety company.

ii. Individual A is the sole director and the sole shareholder.

iii. Company A is the trustee of Trust A and Unit Trust A.

iv. Company A does not carry on a business.

(e) Company B

i. This company is a propriety company.

ii. Individual A is the sole director and the sole shareholder.

iii. Company A does not carry on a business.

(f) Company C

i. This company is a proprietary company.

ii. Individuals A, B and C are the directors.

iii. Individual A has a X% shareholding.

iv. Individuals B and C each have an X% shareholding.

v. Company C is the trustee for the Superannuation Fund.

vi. Company C does not carry on a business.

(g) Company D

i. This company is a proprietary company.

ii. Individuals A, B and C are the directors.

iii. Individuals B and C each have a X% shareholding.

iv. Company D is the trustee for Unit Trust B.

v. Company D does not carry on a business.

(h) Company E

i. This company is a proprietary company.

ii. Individuals A, B and C are the directors.

iii. Individuals B and C each have a X% shareholding.

iv. Company E is the trustee for Unit Trust C.

v. Company E does not carry on a business.

(i) Company F

i. This company is a proprietary company.

ii. Individuals A, B and C are the directors.

iii. Individuals B and C each have a X% shareholding

iv. Company F is the trustee for Trust B and Trust C.

v. Company F does not carry on a business.

(j) Company G

i. This company is a proprietary company.

ii. Individuals B and C are the directors.

iii. Trust D has a X% shareholding.

iv. Company G does not carry on a business.

(k) Company H

i. This company is a proprietary company.

ii. Individual B is the sole director.

iii. Individuals B and C each have a X% shareholding.

iv. Company H is the trustee for Trust E.

v. Company H does not carry on a business.

(l) Unit Trust B

i. Trusts B and C each own X% of the ordinary units.

ii. Trusts B and C each own X of the X special units.

iii. The rights of the special units are set out in the trust deed. The special units give the trustee the power to pay, apply, or set aside none, any, or all of the net income of the trust to or for none, any or all of the holders of the special units in its complete discretion and as the trustee sees fit.

iv. The trustee is Company D.

v. The trust did not make any distributions of income or capital because the trust had a tax loss, or no net income, for the relevant income years.

(m) Unit Trust C

i. This trust carries on a business.

ii. Trusts B and C each own X% of the ordinary units.

iii. Trusts B and C each own X of the X special units.

iv. The rights of the special units are set out in the trust deed. The special units give the trustee the power to pay, apply, or set aside to or for the holders of the special income units the net income of each accounting period. Any payment, application or setting aside need not be made to or for the holders of special income units in proportion to the number of special income units issued or held by them but may be made to or for any holder in respect of one or more special income units to the exclusion of or in an amount different from that paid applied or set aside to or for the holder of any other special income units.

v. The trustee is Company E.

vi. The trust made distributions of income (and capital, to the extent that capital distributions were made) has been paid to, or applied for the benefit of the unit holders in equal proportions for the relevant income years.

(n) Trust B

i. The trust is a discretionary trust established by deed.

ii. The trustee is Company F.

iii. Individual A is the appointer and guardian.

iv. Trust B has a X% interest in Partnership B.

(o) Trust E

i. The trust is a discretionary trust established by deed.

ii. The trustee is Company H.

iii. Individuals B and C are joint appointers and guardians.

iv. The trust carries on a business.

(p) Trust C

i. The trust is a discretionary trust established by deed.

ii. The trustee is Company F.

iii. Individuals B and C are joint appointers and guardians.

iv. Trust C has a X% interest in Partnership B.

(q) Trust D

i. The trust is a discretionary trust established by deed.

ii. The trustees are Individuals B and C.

iii. Individual B is the appointer and guardian.

iv. Trust D has a X% shareholding in Company G.

(r) Superannuation Fund

i. The Superannuation Fund is a SMSF established by deed.

ii. The trustee is Company C.

iii. The members are Individuals A, B and C.

(s) Partnership B

i. The partnership is carried on between Trusts B and C.

ii. Partnership B carries on a business.

(t) Company I

i. This company is a proprietary company.

ii. Individual D is the sole director.

iii. The sole shareholder is Company J as trustee for Trust F.

iv. Prior to the settlement of the Contract, it did not carry on a business.

v. Company I is the purchaser of the Contract.

2. The details of the sale of the business are as follows:

(a) By the Contract, Partnership A (as vendor) agreed to sell, and Company I (as purchaser) agreed to purchase the "business" (as defined in the Contract) free from encumbrances for the "purchase price" (as defined in the Contract).

(b) "Business" is defined in the Contract to include "assets".

(c) "Assets" is defined in the Contract to include the plant and equipment, all fittings, fixtures and improvements of the business premises, the stock in trade, the business names, the licences, the intellectual property, the marketing materials, the assumed contracts, the goodwill, the records and all other property, rights, and assets used in connection with the business.

(d) Pursuant to the Contract, stock in trade is not included in the purchase price.

(e) The purchase price did not include any GST. The parties agreed that the supply of the business and the business assets was a supply of a going concern under Subdivision 38-J of the A New Tax System (Goods and Services Tax) Act 1999 (Cth).

(f) The parties have dealt with each other at arm's length in connection with entry into the Contract.

(g) A valuation company was engaged to provide a valuation of the business carried on by Partnership A.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 38-J

Income Tax Assessment Act 1997 subsection 102-5(1)

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 section 106-5

Income Tax Assessment Act 1997 section 116-40

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 subsection 152-10(1)

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-20

Income Tax Assessment Act 1997 subsection 152-20(1)

Income Tax Assessment Act 1997 paragraph 152-20(1)(a)

Income Tax Assessment Act 1997 subsection 152-20(2)

Income Tax Assessment Act 1997 paragraph 152-20(2)(a)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-35(1)

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 paragraph 152-40(1)(b)

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 subsection 152-70(1)

Income Tax Assessment Act 1997 section 152-75

Income Tax Assessment Act 1997 section 152-78

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 subsection 152-110(2)

Income Tax Assessment Act 1997 section 152-125

Income Tax Assessment Act 1997 subsection 152-125(2)

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 subsection 328-125(2)

Income Tax Assessment Act 1997 subparagraph 328-125(2)(a)(ii)

Income Tax Assessment Act 1997 paragraph 328-125(2)(b)

Income Tax Assessment Act 1997 subsection 328-125(3)

Income Tax Assessment Act 1997 subsection 328-125(4)

Income Tax Assessment Act 1997 subsection 328-125 (7)

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 subsection 328-130(1)

Income Tax Assessment Act 1997 subsection 328-130(2)

Reasons for decision

Question 1

Summary

3. The Commissioner agrees that Trust A made a capital gain from the CGT event happening in relation to Trust A's interest in Partnership A's goodwill.

Detailed reasoning

The sale of the business

4. CGT event A1 happens if a taxpayer "disposes" of a CGT asset (subsection 104-10(1)).

5. The disposal will occur if there is a change of ownership from the taxpayer to another entity (subsection 104-10(2)).

6. The sale of the business is such a disposal of a CGT asset. The ownership of the asset will pass from Partnership A to Company I.

Apportionment of capital gain or capital loss made by the partners

7. Section 106-5 contains the principal rules governing the application of the CGT provisions to partnerships and partners.

8. The partners individually make any capital gain or loss from a CGT event happening in relation to a partnership or one of its CGT assets. Each partner's gain or loss is calculated by reference to the partnership agreement or to partnership law if there is no agreement.

9. Each partner has a separate cost base and reduced cost base for the partner's interest in each CGT asset of the partnership.

10. On the happening of a CGT event to an asset, taken to comprise two or more separate assets, the capital proceeds in respect of the disposal of the asset must be apportioned on a reasonable basis between the separate assets (section 116-40).

11. In CGT Determination TD 9, the Commissioner indicates that there is no statutory formula for apportioning the capital proceeds.

12. In your circumstance the Contract for the sale of the Business was silent in respect of the apportionment between the CGT assets.

13. Partnership A apportioned the purchase price between plant and equipment, other assets (other than goodwill) and goodwill.

14. Partnership A is of the opinion that the amount of the purchase price proposed to be allocated to Partnership A's goodwill represents the market value of the goodwill at the time of the CGT event. For the purposes of this ruling, the Commissioner accepts this apportionment.

15. Under Partnership A, Trust A has an X% interest. Therefore, Trust A's capital proceeds for their goodwill in Partnership A will be calculated by the goodwill amount in Partnership A divided according to Trust A's interest percentage of X%.

16. The cost base of goodwill is separate and distinct from, and does not include, the cost base of other assets of a business - even business assets which are sources of goodwill (TR 1999/16). Therefore, the cost base for the apportionment of goodwill to Trust A is $0.

17. Accordingly, Trust A made a capital gain from the CGT event happening in relation to the goodwill on the sale of the business.

Question 2

Summary

18. The Commissioner agrees that no Specified Entity (Class A) or Specific Entity (Class B) was an "affiliate" (within the meaning contained in section 328-130) of Trust A just before the CGT event.

Detailed reasoning

Meaning of 'Affiliate'

19. An individual or company is an affiliate of an entity where that individual or company acts, or could reasonably be expected to act:

(a) in accordance with the entity's directions or wishes in relation to the affairs of that individual or company's business, or

(b) in concert with the entity in relation to the affairs of the individual or company's business (subsection 328-130(1)).

20. Only an individual or company can be an affiliate of another entity. Entities (for tax purposes) such as trusts, partnerships, and superannuation funds are not capable of being affiliates of an entity.

21. An individual or a company is not an entity's affiliate merely because of the nature of the business relationship shared by the entity and the individual or company share (subsection 328-130(2)).

22. The following factors may have a bearing on whether an individual or company is an affiliate of an entity to the extent that they show that two or more entities are acting in concert:

(a) family or close personal relationships

(b) financial relationships or dependencies

(c) relationships created through links such as common directors, partners, or shareholders

(d) the degree to which the entities consult with each other on business matters, or

(e) whether one of the entities is under a formal or informal obligation to purchase goods or services or conduct aspects of their business with the other entity.

23. None of the above factors are determinative in their own right.

24. Class A specified entities of the group include:

(a) Individual A

(b) Company A, B and C

(c) Unit Trust B and C

(d) Partnership A and B

(e) Trust B, C and E

25. Class B specified entities of the group include:

(a) Individual B, C and D

(b) Company D, E, F, G, H and I

(c) Unit Trust A

(d) Trust D

(e) The Superannuation Fund

26. The following requirements must be met for an entity to qualify as the entity's affiliate:

(a) the entity must be an individual or a company;

(b) the entity must carry on a business; and

(c) in relation to its business affairs, the entity must act, or could reasonably be expected to act according to the directions or wishes of the entity or in concert with the entity.

27. Individuals A, B, C and D were not affiliates of Trust A as none of them carried on a business in their own capacity.

28. Companies A, B, C, D, E, F, G, H and I were not affiliates of Trust A as none of them carried on a business in their own capacity.

29. Unit Trusts A, B, and C and Trusts B, C, D and E were not affiliates of Trust A as a trust cannot be an affiliate of another entity.

30. Partnerships A and B were not affiliates of Trust A as a partnership cannot be an affiliate of another entity.

31. The Superannuation Fund cannot be an affiliate of Trust A as a superannuation fund cannot be an affiliate of another entity.

Question 3

Summary

32. The Commissioner agrees that each Specified Entity (Class A) was "connected with" (within the meaning contained in section 328-125) Trust A just before the CGT event.

Detailed reasoning

The meaning of "connected with"

33. The meaning of "connected with" an entity is set out in section 328-125.

34. An entity is connected with another entity if:

(a) either entity controls the other entity in one of the ways specified in section 328-125, or

(b) both entities are controlled in a way described in section 328-125 by the same third entity.

Direct control of an entity other than a discretionary trust

35. Subsection 328-125(2) states:

An entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates:

(a) except if the other entity is a discretionary trust - own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage) that is at least 40% of:

(i) any distribution of income by the other entity; or

(ii) if the other entity is a partnership - the net income of the partnership; or

(iii) any distribution of capital by the other entity; or

(b) if the other entity is a company - own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, a percentage (the control percentage) that is at least 40% of the voting power in the company.

Direct control of a discretionary trust

36. The two separate tests in subsection 328-125(3) and (4) may be used to determine the direct control of a discretionary trust.

37. Under the first test, an entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates, or the first entity together with its affiliates (subsection 328-125(3)).

38. Under the second test, an entity (the first entity) controls a discretionary trust for an income year if , for any of the four income years before that year:

(a) the trustee of the trust paid to, or applied for the benefit of:

i. the first entity, or

ii. any of the first entity's affiliates, or

iii. the first entity and any of its affiliates;

any of the income or capital of the trust, and

(b) the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year (subsection 328-125(4)).

Indirect control of an entity

39. Indirect control applies to an entity (the first entity) that directly controls another entity (the second entity) as if the first entity also controlled any other entity that is directly or indirectly controlled by the second entity (subsection 328-125(7)).

40. Class A Specific Entities of the group were listed at paragraph 24.

41. Individual A was "connected with" Trust A because Individual A indirectly controlled the trust through his affiliation with it. Here, the trustee company, Company A, is X% owned and controlled by Individual A. Further, Individual A received X % of Trust A's income in the 20VV financial year (subsections 328-125(3), (4) and (7)). Therefore, Individual A directly controlled Trust A just before the CGT event.

42. Company A was "connected with" Trust A because the company is the trustee of Trust A and is X% owned and controlled by Individual A. Further, Company A (as trustee) could be reasonably expected to act in accordance with the directions or wishes of Individual A (subsection 328-125(3)).

43. Company B was "connected with" Trust A because Company B received more than 40% of Trust A's income in the 20TT, 20UU and 20WW financial years (subsection 328-125(4)).

44. Company C was "connected with" Trust A because Individual A directly controls Company C as Individual A owned equity interests in Company C of at least 40% (paragraph 328-125(2)(b)) and Individual A directly controls Trust A.

45. Partnership A was "connected with" Trust A because Partnership A is X% owned by Trust A and Trust A receives X% of Partnership A's income (subparagraph 328-125(2)(a)(ii)).

46. Trust E was "connected with" Trust A because Trust E is indirectly controlled by Individual A and Individual A directly controls Trust A. By way of subsection 328-125(7), the following can be evidenced:

(a) Individual A directly controls Trust B because Individual A received X% of Trust B's income distributions in the 20WW financial year (discussed below).

(b) Trust B directly controls Unit Trust B because Unit Trust B made an election under section 152-78 specifying Trust B to be its controller (discussed below).

(c) Unit Trust B directly controls Trust C because Unit Trust B received more than X% of Trust C's income in the 20UU and 20WW financial years (discussed below).

(d) Trust C directly controls Trust E because Trust C received more than X% of Trust E's income distributions in the 20TT, 20VV and 20UU financial years (discussed below).

(e) Therefore Individual A indirectly controls Trust E and Individual A directly controls Trust A.

47. Trust B was "connected with" Trust A because Trust B is directly controlled by Individual A and Individual A directly controls Trust A. By way of subsection 328-125(7), the following can be evidenced:

(a) Individual A directly controls Trust B because Individual A received X% of Trust B's income distributions in the 20WW financial year (subsection 328-125(4)).

48. Trust C was "connected with" Trust A because Trust C is indirectly controlled by Individual A and Individual A directly controls Trust A. By way of subsection 328-125(7), the following can be evidenced:

(a) Individual A directly controls Trust B because Individual A received X% of Trust B's income distributions in the 20WW financial year (discussed above).

(b) Trust B directly controls Unit Trust B because Unit Trust B made an election under section 152-78 specifying Trust B to be its controller (discussed below).

(c) Unit Trust B directly controls Trust C because Unit Trust B received more than X% of Trust C's income in the 20UU and 20WW financial years (discussed below).

(d) Therefore Individual A indirectly controls Trust C and Individual A directly controls Trust A.

49. Unit Trust B was "connected with" Trust A because Unit Trust B is indirectly controlled by Individual A and Individual A directly controls Trust A. By way of subsection 328-125(7), the following can be evidenced:

(a) Individual A directly controls Trust B because Individual A received X% of Trust B's income distributions in the 20WW financial year (discussed above).

(b) Trust B directly controls Unit Trust B because Unit Trust B made an election under section 152-78 specifying Trust B to be its controller.

(c) Therefore Individual A indirectly controls Unit Trust B and Individual A directly controls Trust A.

50. Unit Trust C was "connected with" Trust A because Unit Trust C is indirectly controlled by Individual A and Individual A directly controls Trust A. By way of subsection 328-125(7), the following can be evidenced:

(a) Individual A directly controls Trust B because Individual A received X% of Trust B's income distributions in the 20WW financial year (discussed above).

(b) Trust B directly controls Unit Trust C because Unit Trust C receives more than 40% of Trust B's distributions (subsection 328-125(4)).

(c) Therefore Individual A indirectly controls Unit Trust C and Individual A directly controls Trust A.

51. Partnership B was "connected with" Trust A because Partnership B is indirectly controlled by Individual A and Individual A directly controls Trust A. By way of subsection 328-125(7), the following can be evidenced:

(a) Individual A directly controls Trust B because Individual A received X% of Trust B's income distributions in the 20WW financial year (discussed above).

(b) Trust B directly controls Partnership B because Trust B owns more than 40% interest in Partnership B.

(c) Therefore Individual A indirectly controls Partnership B and Individual A directly controls Trust A.

52. In conclusion, each Specified Entity (Class A) was "connected with" (within the meaning contained in section 328-125) Trust A just before the CGT event.

Question 4

Summary

53. The Commissioner agrees that no Specified Entity (Class B) was "connected with" (within the meaning contained in section 328-125) Trust A just before the CGT event.

Detailed reasoning

The meaning of "connected with"

54. The meaning of "connected with" an entity is set out in section 328-125 and was discussed at paragraphs 33-39 above.

55. Class B specified entities of the group were listed at paragraph 25 above.

56. The Class B entities were not "connected with" Trust A as these entities did not control the trust, nor did the trust control these entities, in any way described in section 328-125.

Questions 5 to 16

Summary

57. The Commissioner agrees that the methodology used to calculate the "net value of the CGT assets" (as defined in section 152-20), just before the CGT event, is correct for the following entities:

(a) Trust A, B, C and E

(b) Partnership A and B

(c) Company A, B and C

(d) Individual A

(e) Unit Trust B and C

Detailed reasoning

The meaning of "net value of the CGT assets"

58. The meaning of "net value of the CGT assets" is set out in section 152-20.

59. The "net value of CGT assets" is the amount obtained using the following formula:

(a) Sum of the market value of the assets

less

(b) Sum of the entity's liabilities related to the assets and the entity's provisions for annual leave, long service leave, unearned income and tax liabilities.

What is not included in net value of assets

60. In working out the net value of the CGT assets of an entity, the shares, units or other interests (except debt) in another entity that is connected with the first entity (or with an affiliate of the first entity) are ignored (paragraph 152-20(2)(a)). This is to avoid double counting. However, any liabilities related to any such shares, units, or interests must be included.

Unpaid present entitlement (UPE) and the net value of assets

61. TR 2015/4 advises that where a connected beneficiary has a UPE to receive an amount of income or capital from a trust, the value of the UPE will be included once in determining whether or not that trust satisfies the MNAV test in section 152-15.

62. Where the funds representing the connected beneficiary's UPE have not been set aside on sub-trust, the net assets value calculation for the main trust will include the following:

(a) in the net value of the CGT assets of the trust - the value of the funds representing the UPE are included in the trust's assets, but for the purposes of paragraph 152-20(1)(a) are reduced by a corresponding liability of the trustee to pay the amount of that entitlement, and

(b) the net value of the CGT assets of the connected beneficiary - the UPE is an asset of the beneficiary that is not disregarded under paragraph 152-20(2)(a).

63. The Commissioner is satisfied that the methodology used to calculate the "net value of the CGT assets", just before the CGT event, is correct and that any discrepancies in the figures used in the methodologies are minor and would not alter the outcome of the $6,000,000 MNAV test threshold not being breached (as discussed below in paragraphs 64 - 68).

Question 17

Summary

64. The Commissioner agrees that Trust A satisfied the MNAV test (in sections 152-15 and 152-20) for the capital gain.

Detailed reasoning

65. Section 152-15 states that

You satisfy the maximum net asset value 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 (not counting any assets already counted under paragraph (b)).

66. Subsection 152-20(1) provides the meaning of the net value of the CGT assets as being:

(a) the liabilities of the entity that are related to the assets; and

(b) the following provisions made by the entity:

(i) provisions for annual leave;

(ii) provisions for long service leave;

(iii) provisions for unearned income;

(iv) provisions for tax liabilities.

67. Shares, units or other interests (except debt) in an entity connected with the taxpayer or an affiliate of the taxpayer are disregarded. However, any liabilities related to any such shares, units or interests are included (subsection152-20(2)).

68. Based on the correct methodologies used for questions 5 to 16 above, the net value of the CGT assets for Trust A does not exceed the $6,000,000 threshold of the MNAV test.

Question 18

Summary

69. The Commissioner agrees that Partnership A's goodwill satisfied the active assets test in section 152-35 for the capital gain.

Detailed reasoning

The meaning of "Active Assets" test

70. Section 152-40 provides the meaning of an active asset. Essentially, a CGT asset of the taxpayer is an "active asset" if it is used, or held ready for use, in carrying on a business by the taxpayer or by an affiliate or connected entity of the taxpayer.

71. Paragraph 152-40(1)(b) provides that an "active asset" also includes intangible assets inherently connected with carrying on the business by the taxpayer. These include the goodwill of the business.

Period for which asset must have been an active asset

72. The asset must have been an "active asset" for at least half the period of ownership, or at least 7 ½ years if the asset was owned for more than 15 years (subsection 152-35(1)).

73. The ownership period is measured from the time the asset was acquired until the earlier of either (subsection 152-35(2)):

(a) the CGT event or,

(b) the cessation of the business, provided the asset is disposed of within 12 months of cessation of the business.

74. Partnership A began trading in the mid 1990's (when the goodwill was acquired) and was owned by Trust A up to the date of the CGT event (20WW), being a total of more than 15 years. During this time Partnership A actively carried on the business.

75. The goodwill is inherently connected with the carrying on of the business, and therefore satisfies the active asset test.

Question 19

Summary

76. The Commissioner agrees that the basic conditions contained in subsection 152-10(1) were satisfied for the capital gain.

Detailed reasoning

Basic Conditions for relief

77. Subsection 152-10(1) provides the basic conditions for relief for small business entities from capital gains tax. This section is as follows:

A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

a) a CGT event happens in relation to a CGT asset of yours in an income year;

b) the event would (apart from this Division) 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).

78. In your circumstances a CGT event has happened in relation to a CGT asset of yours which would have resulted in a gain. The CGT asset in question satisfies the active asset test and you satisfy the maximum net asset value test, therefore the Commissioner agrees that the basic conditions contained in subsection 152-10(1) have been satisfied.

Question 20

Summary

79. The Commissioner agrees that Trust A can choose to disregard all or part of the gain by applying the small business 15 year exemption in Subdivision 152-B.

Detailed reasoning

The 15 year exemption

80. A taxpayer, whether an individual, company or trust, is entitled to a total exemption on a capital gain (under Subdivision 152-B) if:

a. the basic conditions in Subdivision 152-A are met (i.e. either the maximum net asset value test or the small business entity test, plus the active asset test are satisfied); and

b. the asset has been continuously owned by the taxpayer for at least 15 years up to the time of the CGT event;

if the taxpayer is a company or trust:

c. the taxpayer had a significant individual for a total of at least 15 years of the whole period of ownership, and

d. the individual who was a significant individual just before the CGT event was:

• at least 55 years old at that time and the event happened in connection with their retirement, or

• was permanently incapacitated at that time.

if the taxpayer is an individual

e. when the CGT event happened:

• the taxpayer was permanently incapacitated, or

• the taxpayer was 55 years old, or older, and the event happened in connection with the taxpayer's retirement, and

f. if the CGT asset is a share in a company or an interest in a trust, that company or trust must have had a significant individual for periods totalling at least 15 years during the entire time the taxpayer owned the share or interest, even if it was not the same significant individual during the whole time.

81. Note that any ordinary or statutory income derived by a company or trust from a CGT event which would give rise to the 15 year exemption is neither assessable income nor exempt income (subsection 152-110(2)).

82. Here, Trust A satisfies the basic conditions in Subdivision 152-A and the continuous ownership period of at least 15 years as discussed above.

Significant Individual

83. Section 152-55 provides the meaning of significant individual as an individual who has a small business participation percentage in the company or trust of at least 20%.

84. An entity's small business participation percentage is the sum of the entity's direct and indirect percentages (section 152-65).

85. Where entities have entitlements to all the income and capital of the trust, an entity's direct small business participation percentage is the percentage of the income and capital of the trust that the entity is beneficially entitled to receive (subsection 152-70(1)).

86. An entity's direct small business participation percentage in a trust, where entities do not have entitlements to all the income and capital of the trusts, if the trust made a distribution of income or capital, is the percentage of distributions of income and capital that the entity is beneficially entitled to during the income year. If the trust did not make a distribution of income or capital during the income, it will not have a significant individual during that income year (subsection 152-70(1)).

87. An entity's indirect small business participation percentage 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 (section 152-75).

88. The interposed entity between Individual A and Trust A is Company A. Individual A owns X% of the shares in this non-trading entity, and therefore owns all the voting rights in the entity.

89. Therefore, the percentages provided below (paragraph 90) will be calculated at X% in the calculation provided by section 152-75.

90. The direct small business participation percentage for the previous 15 years for Individual A in Trust A has been outlined in your letter.

91. Therefore, it can be concluded that Trust A had a significant individual, Individual A, for the 15 years preceding the CGT event.

92. Individual A was older than 55 years of age at the time of the CGT event.

93. The CGT event happened in connection with Individual A retirement. The sale of the business will result in Individual A's involvement coming to an end.

94. In conclusion, the Commissioner agrees that Trust A can choose to disregard all or part of the gain by applying the small business 15 year exemption in Subdivision 152-B.

Question 21

Summary

95. Assuming that the gain was the only capital gain made by Trust A for the income year, and Trust A chooses to apply the small business 15 year exemption in Subdivision 152-B to disregard the entire capital gain, the Commissioner agrees that Trust A's net capital gain for the income year ended 30 June 2015 worked out under subsection 102-5(1) will be nil.

Detailed reasoning

96. Subsection 102-5(1) explains the calculation of your net capital gain (if any) for the income year. Note 2 to Step 1 under this subsection advises

that some provisions of this Act permit or require you to disregard certain capital gains or losses when working out your net capital gain. Subdivision 152-B permits you, in some circumstances, to disregard a capital gain on an asset you held for at least 15 years.

97. Given the answer above at question 20, Trust A is able to disregard all or part of the capital gain by applying the small business 15 year exemption in Subdivision 152-B.

98. Therefore if Trust A has no other capital gains in this income year their net capital gain worked out under subsection 102-5(1) will be nil for this income year.

Question 22

Summary

99. The Commissioner agrees that if Trust A makes one or more payments (whether directly or indirectly through one or more interposed entities) in relation to the 15 year exemption amount (within two years of the CGT event) to Individual A, in determining the taxable income of Trust A, Individual A or any of the interposed entities, the total amount of such payment or payments made to Individual A can be disregarded.

Detailed reasoning

Distributions of the exemption amount

100. If a capital gain made by a company or trust is disregarded under the small business 15 year exemption any distributions made by the company or trust of that exempt amount to a CGT concession stakeholder is:

(a) not included in the assessable income of the CGT concession stakeholder, and

(b) not deductible to the company or trust

if certain conditions are satisfied.

101. The conditions are in section 152-125 and are as follows:

(a) the company or trust must make a payment within two years after the CGT event that resulted in the capital gain or, in appropriate circumstances, such further times as allowed by the Commissioner,

(b) the payment must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event, and

(c) the total payments made to each CGT concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholder's control percentage by the exempt amount.

CGT Concession Stakeholder

102. The CGT concession stakeholder's participation percentage is:

(a) for a company or trust (where entities have entitlements to all the income or capital of the trust) the stakeholder's small business participation percentage in the company or trust just before the CGT event, and

(b) for a trust (where entities do not have entitlements to all the income or capital of the trust) the amount, expressed as a percentage, worked out using the formula in subsection 152-125(2):

100 / N

(c) where N is the number of CGT concession stakeholders of the trust just before the CGT event.

103. Here, Individual A was the only CGT concession stakeholder of the trust just before the CGT event.

104. In conclusion, the amount will be disregarded provided the amount is paid to Individual A (the CGT concession stakeholder) either directly or indirectly through one or more interposed entities within two years after the CGT event.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).