Edited version of your written advice

Authorisation Number: 1051336571457

Date of advice: 15 February 2018

Ruling

Subject: Income Tax: Capital Gains Tax: Small business relief

Question 1

Do the Land and Original Building owned by Company A Pty Ltd (‘Company A’) retain their pre-CGT acquisition status, for the purposes of the CGT provisions of the Income Tax Assessment Act 1936 (ITAA 1936) and Income Tax Assessment Act 1997 (ITAA 1997), after the share transfer transaction in the year ending 30 June 1986?

Answer

No.

Question 2

Are the Land and Original Building owned by Company A separate CGT assets, or do they comprise one single CGT asset for the purposes of the CGT provisions of the ITAA 1997?

Answer

No – they comprise one single CGT asset.

Question 3

Are any of the improvements made to the Building by Company A in 19XX, 20XX and 20XX (‘the Extensions’) separate CGT assets from the Land for the purposes of the CGT provisions of the ITAA 1997?

Answer

No.

Question 4

Are the Land, Building and Extensions a single post-CGT asset for the purposes of the CGT provisions of the ITAA 1997?

Answer

Yes.

Question 5

Are some of the assets within the Building depreciating assets which are separate CGT assets to the Land, Building and Extensions for the purposes of the CGT provisions of the ITAA 1997?

Answer

Yes.

Question 6

Will Company A be eligible to choose to apply the small business 50% reduction pursuant to section 152-205 of the ITAA 1997 to reduce by 50% the amount of the capital gain which will arise if it disposes of the Property (comprising the Land, Building and Extensions) to the trustee (‘the Trustee’) for a self-managed superannuation fund, in the income years ending 30 June 20XX or 30 June 20XX?

Answer

Yes.

Question 7

Will Company A be eligible to choose to apply the small business retirement exemption pursuant to subsection 152-305(2) of the ITAA 1997 to disregard, and not include in its assessable income an amount of up to $XXX, representing part of the capital gain which will arise if Company A disposes of the Property (comprising the Land, Building and Extensions) to the trustee (‘the Trustee) for a self-managed superannuation fund, in the income years ending 30 June 20XX or 30 June 20XX?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

SUMMARY OF KEY BACKGROUND FACTS

Current group structure

1. Individual 1 directly or indirectly controls the following entities:

a) Company C Pty Ltd (‘Company C’)

b) Company B Pty Ltd (‘Company B’)

c) Company A Pty Ltd (‘Company A’)

2. Individual 1 is not under 55 years of age.

3. Individual 1 owns a total of XX per cent (held across two classes of shares) of the shares on issue in Company C Pty Ltd.

4. Company C owns a total of XX% (held across two classes of shares) of the shares on issue in Company B.

5. Company B owns XX per cent of the shares on issue in Company A.

6. Company A owns a commercial property (comprising land and a building, and extensions subsequently made to the ‘original building’) situated in Australia (‘the Property’).

Proposed transaction

7. Company A proposes to sell the Property to the trustee (‘the Trustee’) of a self-managed superannuation fund (‘SMSF’).

8. Company A will make a capital gain if it disposes of the Property to the Trustee.

9. Company A wishes to:

a) choose to apply the small business 50% reduction pursuant to section 152-205 of the ITAA 1997 to reduce by 50% the amount of a capital gain which will arise if Company A disposes of the Property to the Trustee

b) choose to apply the small business retirement exemption pursuant to subsection 152-305(2) of the ITAA 1997 to disregard, and not include in its assessable income an amount of up to $XXX, representing part of the capital gain which will arise if Company A disposes of the Property to the Trustee.

DETAILED BACKGROUND FACTS

Company A

Formation and corporate governance

10. Company A was registered as an Australian Proprietary Company in the 19XX’s.

Business, Land, Building and Extensions

11. In the 19XX’s, and before 20 September 1985:

a. Company A began carrying on an industrial products business (‘the Business’).

b. Company A purchased a property in Australia (‘the Land’).

c. Company A caused a building to be constructed on the Land (‘the Building’/’the Original Building’).

12. Company A made extensions to the Building in 19XX’s and 20XX’s (‘the Extensions’).

13. Company A depreciates the Building (including the Extensions) pursuant to Division 43 of the ITAA 1997 (and not pursuant to Division 40 of the ITAA 1997).

14. Company A depreciates the following assets, that are situated within the Building, pursuant to Division 40 of the ITAA 1997:

a) office partitioning

b) sign posts

c) floodlights.

15. Company A used the Land, Building and Extensions from their respective acquisition or completion dates, in the course of carrying out the Business.

16. In the year ending 30 June 20XX, Company A sold the Business to a third party. Since that date, Company A has leased the Property to the purchaser of the business.

Current rights of members

17. Details of the sole class of shares on issue in Company A are as follows:

Company A Details of shares
Number of Share Classes	1
Share Class	Ordinary
Shares Issued	X
Fully /Partially Paid	Fully Paid

18. The rights attaching to the shares in Company A are as follows:

Company A Shareholder rights
Sole Member	Company B
Smallest percentage of voting power in the company	XX%
Smallest percentage of any dividend that the company may pay	XX%
Smallest percentage of any distribution of capital that the company may pay	XX%

Ownership of Company A immediately prior to 20 September 1985

19. Immediately prior to 20 September 1985, Company A had X ordinary shares on issue.

20. At that time, the members of Company A were as follows:

Company A Members and shareholdings
Date	Member	Shares held
19/09/1985	Company B	XX% of ordinary shares
19/09/1985	Company D	XX% of ordinary shares

21. At that time, Company B and Company D were ultimately controlled by unrelated parties.

22. Members Company B (or its shareholders) have never held any interest (whether directly or indirectly) in Company D.

23. Members of Company D (or its shareholders) have never had any interest (whether directly or indirectly) in Company B or Company C.

24. Company D (or its shareholders) have never had a common director with either Company B, or Company C.

25. Company D (or its shareholders) have never had a common company secretary with either Company B, or Company C.

Ownership of Company B immediately prior to 20 September 1985

26. Immediately prior to 20 September 1985, Company B had X shares on issue.

27. At that time, the members of Company B were as follows:

Company B Members and shareholdings
Date	Member	Shares held
19/09/1985	Company C	XX% of shares on issue
19/09/1985	Individual 5	XX% of shares on issue

Ownership of Company C immediately prior to 20 September 1985

28. Immediately prior to 20 September 1985, four individuals held all of the shares in Company C.

29. At that time the members of Company C were as follows:

Company C Members and shareholdings
Date	Member
19/09/1985	Individual 2
19/09/1985	Individual 3
19/09/1985	Individual 4
19/09/1985	Individual 1

Control and ownership of Company D immediately prior to 20 September 1985

30. Immediately prior to 20 September 1985, Company D was controlled by unrelated third parties with no connection to the individuals who were the members of Company B and Company C (that is Individuals 1, 2, 3, 4 and 5).

31. Individuals 1, 2, 3, 4 and 5 have never had any interest (whether directly or indirectly) in Company D.

Ownership of Company A immediately prior to the date of the share transfer transaction in the year ending 30 June 1986

32. Immediately prior to the share transfer transaction, both Company B and Company D continued to hold XX% of the shares on issue in Company A.

33. At that time:

a) Company C continued to hold XX% of the shares on issue in Company B

b) Individual 5 continued to hold XX % of the shares on issue in Company B.

34. Further, at that time, the same four individuals continued to hold all of the shares in Company C.

35. The applicant does not know, but assume that there had not been any change in underlying ownership of Company D between 20 September 1985 and the date of the share transfer transaction.

Ownership of Company A from the date of the share transfer transaction in the year ending 30 June 19XX

36. On a particular date in the year ending 30 June 19XX, Company D transferred all of its ordinary shares in Company A to Company B.

37. After the share transaction transfer, Company B owned XX%.

Company B

Formation and corporate governance

38. Company B was registered as an Australian Proprietary Company in the 19XX’s.

Current rights of members

39. The current shareholders of Company B are as follows:

Company B Details of shares
Company C	XX% of shares on issue (held across two classes of shares)
Individual 5	XX% of shares on issue (held across two classes of shares)

40. The rights attaching to the shares in Company B are as follows:

Company B Shareholder rights
	Company C	Individual 5
Smallest percentage of voting power in the company	XX%	XX%
Smallest percentage of any dividend that the company may pay	XX%	XX%
Smallest percentage of any distribution of capital that the company may pay	XX%	XX%

Company C

Formation and corporate governance

41. Company C was registered as an Australian Proprietary Company in the 19XX’s.

Current rights of members

42. The current shareholders in Company C are as follows:

Company C Details of shares
Individual 1	XX% of shares on issue (held across two classes of shares)
Individual 4	XX% of shares on issue (held one class of shares)

43. The rights attaching to the shares in Company C are as follows:

Company C Shareholder rights
	Individual 1	Individual 4
Smallest percentage of voting power in the company	XX%	XX%
Smallest percentage of any dividend that the company may pay	XX%	XX%
Smallest percentage of any distribution of capital that the company may pay	XX%	XX%

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 160ZZRR(1)

Income Tax Assessment Act 1936 section 160ZZRS

Income Tax Assessment Act 1936 section 160ZZRT

Income Tax Assessment Act 1936 section 160ZZS

Income Tax Assessment Act 1936 subsection 160ZZS(1)

Income Tax Assessment Act 1936 paragraph 160ZZS(1A)(a)

Income Tax Assessment Act 1936 paragraph 160ZZS(1A)(b)

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Subdivision 40-D

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 subsection 40-45(2)

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 subsection 43-20(1)

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(4)

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 section 108-55

Income Tax Assessment Act 1997 subsection 108-55(1)

Income Tax Assessment Act 1997 section 108-60

Income Tax Assessment Act 1997 section 108-70

Income Tax Assessment Act 1997 subsection 108-70(1)

Income Tax Assessment Act 1997 subsection 109-5(1)

Income Tax Assessment Act 1997 subsection 109-5(2)

Income Tax Assessment Act 1997 section 149-10

Income Tax Assessment Act 1997 section 149-30

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 subsection 152-5(1)

Income Tax Assessment Act 1997 section 152-10

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

Income Tax Assessment Act 1997 paragraph 152-10(1)(a)

Income Tax Assessment Act 1997 paragraph 152-10(1)(b)

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

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

Income Tax Assessment Act 1997 section 152-50

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-70

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

Income Tax Assessment Act 1997 section 152-75

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 section 152-205

Income Tax Assessment Act 1997 subsection 152-205(2)

Income Tax Assessment Act 1997 section 152-210

Income Tax Assessment Act 1997 paragraph 152-210(1)(a)

Income Tax Assessment Act 1997 section 152-215

Income Tax Assessment Act 1997 section 152-220

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 subsection 152-305(2)

Income Tax Assessment Act 1997 paragraph 152-305(2)(a)

Income Tax Assessment Act 1997 paragraph 152-305(2)(b)

Income Tax Assessment Act 1997 paragraph 152-305(2)(c)

Income Tax Assessment Act 1997 subsection 152-310(1)

Income Tax Assessment Act 1997 paragraph 152-315(1)(b)

Income Tax Assessment Act 1997 section 152-320

Income Tax Assessment Act 1997 section 152-325

Income Tax Assessment Act 1997 paragraph 152-325(1)(b)

Income Tax Assessment Act 1997 subsection 152-325(4)

Income Tax Assessment Act 1997 paragraph 152-325(4)(b)

Income Tax Assessment Act 1997 subsection 152-325(5)

Income Tax Assessment Act 1997 paragraph 152-325(5)(a)

Income Tax Assessment Act 1997 paragraph 152-325(5)(b)

Income Tax Assessment Act 1997 subsection 152-325(7)

Income Tax Assessment Act 1997 section 355-315

Income Tax Assessment Act 1997 section 355-525

Income Tax (Transitional Provisions) Act 1997 section 149-5

Reasons for decision

Question 1

Do the Land and Original Building owned by Company A retain their pre-CGT acquisition status, for the purposes of the CGT provisions of the Income Tax Assessment Act 1936 (ITAA 1936) and Income Tax Assessment Act 1997 (ITAA 1997), after the share transfer transaction in the year ending 30 June 19XX?

Summary

Following the share transfer transaction in the year ending 30 June 19XX, XX% (that is, the majority) of the underlying interests in the Land and Original Building (owned by Company A) were indirectly (via their respective shareholdings in Company C and Company B, and the respective shareholdings of those companies in Company A) held by natural persons who immediately prior to 20 September 1985, did not hold (directly or indirectly) the majority of the underlying interests in the Land and Original Building.

Accordingly, former section 160ZZS of the ITAA 1936 applied to deem the Land and Building to have been acquired by Company A on the date of the share transfer transaction during the year ending 30 June 19XX for the purposes of the CGT provisions of Part IIIA of the ITAA 1936, for a consideration equal to their market value as at that date.

As former section 160ZZS of the ITAA 1936 applied, the ITAA 1997 provisions operate on the basis that the asset is to be taken to have been acquired on the date prescribed in section160ZZS (ie when the majority underlying beneficial interest ceased) – refer section 149-5 of the Income Tax (Transitional Provisions) Act 1997.

Detailed reasoning

1. In certain circumstances where the beneficial interests in a privately held company change, former section 160ZZS of the ITAA 1936, and similarly the current equivalent provision, section 149-30 of the ITAA 1997, will cause any of the company’s assets acquired prior to 20 September 1985 to lose their pre –CGT status.

2. Former section 160ZZS of the ITAA 1936 applied to events which occurred prior to 1 July 1998, and section 149-30 of the ITAA 1997 applies to events which have occurred post 1 July 1998.

3. During the year ending 30 June 19XX, a share transfer transaction occurred which resulted in a change in the shareholding of Company A. Therefore, former section 160ZZS of the ITAA 1936 is the relevant provision under which to consider the relevant CGT consequences of the transaction.

4. Former subsection 160ZZS(1) provides that an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset.

5. That is, the provision operates to deem an asset to stop being a pre –CGT asset at the earliest time when majority underlying interests in the asset were not held by natural persons who had majority underlying interests in the asset immediately before 19 September 1985, resulting in any subsequent capital gain on the asset falling within the tax base.

6. Where an asset is deemed by former section 160ZZS to have been acquired after 19 September 1985, the asset will be taken to have been acquired on the date on which the continuity of beneficial ownership in the asset of more than XX% ceases to be maintained (paragraph 160ZZS(1A)(a)). The cost base for the purposes of determining future capital gains and losses on realisation of such an asset will be the market value of the asset on the date on which the asset is taken to have been acquired by the application of section 160ZZS (paragraph 160ZZS(1A)(b)).

7. The Commissioner has to be satisfied that the majority underlying interests in the asset has not changed. Otherwise, the asset is deemed to have been acquired at the time that the change in the majority underlying interest in the asset happened.

8. Former subsection 160ZZRR(1) provides that majority underlying interests, in relation to an asset, means more than one-half of:

a) the beneficial interests that natural persons hold (whether directly or indirectly) in the asset; and

b) the beneficial interests that natural persons hold (whether directly or indirectly) in any income that may be derived from the asset. (emphasis added)

9. Former sections 160ZZRS and 160ZZRT of the ITAA 1936, which applied at the relevant time, establish when a natural person indirectly has a beneficial interest in the pre-GST asset of another entity or income that may be derived from that asset. To have a beneficial interest, the natural person must be entitled to receive for their own benefit any distribution of capital or income if:

a) the other entity were to distribute any of its capital or income, and

b) the capital and income were then successfully paid or distributed by each entity interposed between the other entity and the person.

10. Therefore, 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.

11. Accordingly, the law 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 beneficial interests of natural persons in the assets.

12. It is immaterial if there is a change in the proportions in which the natural persons/ultimate owners hold underlying interests in an asset (Taxation Ruling IT 2530, at paragraph 10).

13. Where former section 160ZZS of the ITAA 1936 applied, the ITAA 1997 provisions operate on the basis that the asset is to be taken to have been acquired on the date prescribed in section160ZZS (ie when the majority underlying beneficial interest ceased) – refer section 149-5 of the Income Tax (Transitional Provisions) Act 1997.

Application to your circumstances

14. In the present case, in the 1980’s and pre 20 September 1985, Company A purchased the Land and constructed the Original Building on the Land.

Ownership of Company A immediately prior to 20 September 1985

15. Immediately prior to 20 September 1985, the members of Company A were as follows:

Company A Members and shareholdings
Date	Member	Shares held
19/09/1985	Company B	XX% ordinary shares
19/09/1985	Company D	XX% ordinary shares

16. At that time, Company B and Company D was ultimately controlled by unrelated parties.

17. Members Company B (or its shareholders) have never held any interest (whether directly or indirectly) in Company D.

18. Members of Company D (or its shareholders) have never had any interest (whether directly or indirectly) in Company B or Company C.

19. Company D (or its shareholders) have never had a common director with either Company B, or Company C.

20. Company D (or its shareholders) have never had a common company secretary with either Company B or Company C.

Ownership of Company B immediately prior to 20 September 1985

21. Immediately prior to 20 September 1985, the members of Company B were as follows:

Company B Members and shareholdings
Date	Member	Shares held
19/09/1985	Company C	XX% of shares on issue
19/09/1985	Individual 5	XX% of shares on issue

Ownership of Company C immediately prior to 20 September 1985

22. Immediately prior to 20 September 1985, four individuals held all of the shares in Company C.

Control and ownership of Company D immediately prior to 20 September 1985

23. Immediately prior to 20 September 1985, Company D was controlled by unrelated third parties with no connection to the individuals who were the members of Company B and Company C (that is Individuals 1, 2, 3, 4 and 5).

24. Individuals 1, 2, 3, 4 and 5 have never had any interest (whether directly or indirectly) in Company D.

Ownership of Company A immediately prior to the date of the share transfer transaction in the year ending 30 June 1986

25. Immediately prior to the share transfer transaction, both Company B and Company D continued to hold XX% of the shares on issue in Company A.

26. At that time:

a) Company C continued to hold XX% of the shares on issue in Company B

b) Individual 5 continued to hold XX% of the shares on issue in Company B.

27. Further, at that time, the same four individuals continued to hold all of the shares in Company C.

28. The applicant does not know, but assume that there had not been any change in underlying ownership of Company D between 20 September 1985 and the date of the share transfer transaction.

Ownership of Company A from the date of the share transfer transaction in the year ending 30 June 1986

29. In the year ending 30 June 19XX, Company D transferred all of its ordinary shares in Company A to Company B in a share transfer transaction.

30. After the date of the share transfer transaction, Company B owned XX% of the shares in Company A.

31. Following the share transfer transaction, XX% (that is the majority) of the underlying interests in the Land and Building (owned by Company A) were indirectly (via their respective shareholdings in Company C and Company B, and the respective shareholdings of those companies in Company A) held by the following 5 natural persons:

● Individual 1

● Individual 2

● Individual 3

● Individual 4

● Individual 5

Conclusion

32. Immediately prior to 20 September 1985, the 5 abovementioned persons did not hold (directly or indirectly) the majority of the underlying interests in the Land and Building, as XX% of the sole class of shares on issue in Company A at that time were owned by Company D, who were ultimately owned and controlled by unrelated parties to Company B (who held the remaining XX% of the shares on issue in Company A), or any of the natural persons who had any underlying interests or control in Company B.

33. Accordingly, after the date of the share transfer transaction (in the year ending 30 June 1986) the Commissioner cannot be satisfied, or find it reasonable to assume, that more than XX% of the beneficial interests and therefore majority underlying interests in the Land and Building were held by natural persons who, immediately before September 1985, held majority underlying interests in the Land and Building. Section 160ZZS of the ITAA 1936 would therefore apply to deem the Land and Building to have been acquired by Company A on the date of the share transfer transaction for the purposes of the CGT provisions of Part IIIA of the ITAA 1936, for a consideration equal to their market value as at that date.

34. As former section 160ZZS of the ITAA 1936 applied, the ITAA 1997 provisions operate on the basis that the asset is to be taken to have been acquired on the date prescribed in section 160ZZS (ie when the majority underlying beneficial interest ceased) – refer section 149-5 of the Income Tax (Transitional Provisions) Act 1997.

Question 2

Are the Land and Original Building owned by Company A separate CGT assets, or do they comprise one single CGT asset for the purposes of the CGT provisions of the ITAA 1997?

Summary

As Subdivision 40-D, and sections 355-315 and 355-525 do not apply to the Building, the Building is not taken to be a separate asset from the Land pursuant to section 108-55(1) of the ITAA 1997. Accordingly, the Land and Building are treated as a single post CGT asset, in accordance with the common law principle that what is attached to the land is part of the land.

Detailed reasoning

1. For CGT purposes, there are exceptions to the common law principle that what is attached to the land is part of the land.

2. Section 108-55 of the ITAA 1997 is the relevant provision to consider to determine when a building is a separate CGT asset from land that it is attached to.

3. Subsection 108-55(1) of the ITAA 1997 provides that a building or structure on your land that you acquired on or after 20 September 1985 is taken to be a separate CGT asset from the land if one of two balancing adjustment provisions applies to the building or structure (whether or not there is a balancing adjustment):

a) Subdivision 40-D (about balancing adjustments for depreciating assets); or

b) section 355-315 or 355-525 (about R & D).

4. A depreciating asset is defined under section 40-30 of the ITAA 1997 to be (with exceptions) an asset that has a limited effective life and can reasonably be expected to decline in value over the time that it is used, and can include a commercial building.

Application to your circumstances

5. Company A is deemed to have acquired the Land and Building after 20 September 1985 (in the year ending 30 June 19XX) pursuant to former section 160ZZS of the ITAA 1936.

6. As former section 160ZZS of the ITAA 1936 applied, the ITAA 1997 provisions operate on the basis that the asset is to be taken to have been acquired on the date prescribed in section160ZZS (ie when the majority underlying beneficial interest ceased) – refer section 149-5 of the Income Tax (Transitional Provisions) Act 1997.

7. Therefore, under subsubsection 108-55(1), the Land and Building will be taken to be separate CGT assets if one of the following balancing adjustments provisions applies to the Building (whether or not there is a balancing adjustment):

a) a balancing adjustment pursuant to Subdivision 40-D of the ITAA 1997, or

b) a balancing adjustment pursuant to section 355-315 or 355-525 of the ITAA 1997.

Subdivision 40-D

8. Company A have advised that they currently depreciate the Building pursuant to Division 43 of the ITAA 1997 (under which a taxpayer can claim a deduction for capital works, being a building, or an extension, alteration or improvement to a building).

9. Subsection 40-45(2) of the ITAA provides that Division 40 (which relevantly includes Subdivision 40-D) does not apply to capital works (which includes buildings) for which you can deduct amounts under Division 43.

10. Accordingly, as Company A depreciates the Building pursuant to Division 43, subsection 40-45(2) excludes Subdivision 40-D from applying to the Building.

Sections 355-315 and 355-525

11. Sections 355-315 and 355-525 relate to assets only used for research and development activities.

12. Company A have advised that these balancing adjustment provisions do not apply to the Building.

Conclusion

13. As Subdivision 40-D, and sections 355-315 and 355-525 do not apply to the Building, the Building is not taken to be a separate asset from the Land pursuant to subsection 108-55(1) of the ITAA 1997.

14. Accordingly, the Land and Building are treated as a single post CGT asset, in accordance with the common law principle that what is attached to the land is part of the land.

Question 3

Are any of the improvements made to the building in 19XX, 20XX and 20XX (‘the Extensions’) separate CGT assets from the Land for the purposes of the CGT provisions of the ITAA 1997?

Summary

As Subdivision 40-D, and sections 355-315 and 355-525 do not apply to the Extensions, the Extensions are not taken to be separate assets from the Land pursuant to subsection 108-70(1) of the ITAA 1997. Accordingly, the Land and the Extensions are treated as a single post CGT asset, in accordance with the common law principle that what is attached to the land is part of the land.

Detailed reasoning

1. For CGT purposes, there are exceptions to the common law principle that what is attached to the land is part of the land.

2. Section 108-70 of the ITAA is the relevant provision to consider to determine when a capital improvement is a separate CGT asset from land that it is attached to.

3. Subsection 108-70(1) of the ITAA 1997 provides that a capital improvement to land is taken to be a separate CGT asset from the land if one of the balancing adjustment provisions set out in subsection 108-55(1) applies to the improvement (whether or not there is a balancing adjustment).

4. The balancing adjustment provisions set out in subsection 108-55(1) are:

a) Subdivision 40-D (about balancing adjustments for depreciating assets); or

b) section 355-315 or 355-525 (about R & D).

5. Subsection 43-20(1) of the ITAA 1997 provides that Division 43 (about deductions for capital works), applies to capital works being a building, or an extension, alteration or improvement to a building, begun in Australia after 21 August 1979. (emphasis added)

Application to your circumstances

Subdivision 40-D

6. Company A have advised that they depreciate the Extensions made to the building in the 19XX’s and 2000’s, pursuant to Division 43 of the ITAA 1997 (under which a taxpayer can claim a deduction for capital works, including buildings and extensions to a building).

7. Subsection 40-45(2) of the ITAA 1997 provides that Division 40 (which includes Subdivision 40-D) does not apply to capital works (which includes buildings and extensions to buildings) for which you can deduct amounts under Division 43.

8. Accordingly, as Company A depreciates the Extensions pursuant to Division 43, subsection 40-45(2) excludes Subdivision 40-D from applying to the Extensions.

Sections 355-315 and 355-525

9. Sections 355-315 and 355-525 relate to assets only used for research and development activities.

10. Company A have advised that that these balancing adjustment provisions do not apply to the Extensions.

Conclusion

11. As Subdivision 40-D, and sections 355-315 and 355-525 do not apply to the Extensions, the Extensions are not taken to be separate assets from the Land pursuant to subsection 108-70(1) of the ITAA 1997.

12. Accordingly, the Land and the Extensions are treated as a single post CGT asset, in accordance with the common law principle that what is attached to the land is part of the land.

Question 4

Are the Land, Building and Extensions a single post-CGT asset for the purposes of the CGT provisions of the ITAA 1997?

Summary

The Land, Building and Extensions comprise a single post-CGT asset for the purposes of the CGT provisions of the ITAA 1997.

Detailed reasoning

1. Following the share transfer transaction in the year ending 30 June 19XX, former section 160ZZS of the ITAA 1936 applied to deem the Land and Building to have been acquired by Company A on the date of the share transfer transaction for the purposes of the CGT provisions of Part IIIA of the ITAA 1936, for a consideration equal to their market value as at that date. Refer detailed reasoning under Question 1.

2. As Subdivision 40-D, and sections 355-315 and 355-525 do not apply to the Building, the Building is not taken to be a separate asset from the Land pursuant to subsection 108-55(1) of the ITAA 1997. Accordingly, the Land and Building are treated as a single post CGT asset, in accordance with the common law principle that what is attached to the land is part of the land. Refer detailed reasoning under Question 2

3. As Subdivision 40-D, and sections 355-315 and 355-525 do not apply to the Extensions, the Extensions are not taken to be separate assets from the Land pursuant to subsection 108-70(1) of the ITAA 1997. Accordingly, the Land and the Extensions are treated as a single post CGT asset, in accordance with the common law principle that what is attached to the land is part of the land. Refer detailed reasoning under Question 3.

Conclusion

4. The Land and Building are deemed to be post-CGT assets (pursuant to former section 160ZZS of the ITAA 1936), and the Building is not taken to be a separate asset from the Land (pursuant to subsection 108-55(1) of the ITAA 1997, and in accordance with the common law principle that what is attached to the land is part of the land).

5. Further, the Extensions are not taken to be a separate asset from the Land (pursuant to subsection 108-70(1) of the ITAA 1997, and in accordance with the common law principle that what is attached to the land is part of the land).

6. Accordingly the Land, Building and Extensions comprise a single post-CGT asset for the purposes of the CGT provisions of the ITAA 1997.

Question 5

Are some of the assets within the Building depreciating assets which are separate CGT assets to the Land, Building and Extensions for the purposes of the CGT provisions of the ITAA 1997?

Summary

Pursuant to section 108-60 of the ITAA 1997, the office partitioning, sign post and flood lights are taken to be a separate CGT assets from the Land, Building and Extensions.

Detailed reasoning

1. Section 108-60 of the ITAA 1997 states that a depreciating asset that is part of a building or structure is taken to be a separate CGT asset from the building or structure.

2. A depreciating asset is defined under section 40-30 of the ITAA 1997 to be (with exceptions) an asset that has a limited effective life and can reasonably be expected to decline in value over the time that it is used.

Application to your circumstances

3. Therefore, in the current case, depreciating assets which are part of the Building will be taken to be separate CGT assets from the Land, Building and Extensions previously considered.

4. Company A has advised that it currently works out the decline in value of the following assets that are situated within the building pursuant to Division 40 of the ITAA 1997:

a) office partitioning

b) sign post

c) flood lights.

5. Accordingly, the above items are taken to be separate CGT assets from the Land, Building and Extensions previously considered in the current case.

Conclusion

6. The office partitioning, sign post and flood lights are taken to be a separate CGT assets from the Land, Building and Extensions pursuant to section 108-60 of the ITAA 1997.

Question 6

Will Company A be eligible to choose to apply the small business XX% reduction pursuant to section 152-205 of the ITAA 1997 to reduce by XX% the amount of the capital gain which will arise if it disposes of the Property (comprising the Land, Building and Extensions) to the trustee (‘the Trustee’) for a self-managed superannuation fund, in the income years ending 30 June 20XX or 30 June 20XX?

Summary

If Company A proceed with the sale of the property to the Trustee in the years ending 30 June 20XX or 30 June 20XX, it will meet the four basic conditions for relief under section 152-10 of Subdivision 152-A, and accordingly will be eligible to apply the small business XX% reduction under section 152-205 to the relevant amount of the capital gain.

Detailed reasoning

Subdivision 152-C – Small business 50% reduction

1. Subdivision 152-C of the ITAA 1997 sets out the requirements that must be satisfied for a taxpayer to be eligible to qualify for the small business 50% reduction.

2. Section 152-205 of Subdivision 152-C provides that the amount of a capital gain remaining after applying step 3 of the method statement in subsection 102-5(1) (about reducing a discount capital gain by any applicable discount percentage), is reduced by 50%, if the basic conditions in Subdivision 152-A are satisfied for the gain.

Subdivision 152-A – Basic conditions for relief

3. Section 152-5 of Subdivision 152-A of the ITAA 1997 describes some of the basic conditions for relief that must be satisfied for a taxpayer to be eligible to reduce its capital gains using the small business concessions under Division 152.

4. Section 152-10 sets out the four basic conditions for relief under Division 152:

SECTION 152-10 Basic conditions for relief

152-10(1)

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

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

Note:…

(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 *CGT 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 CGT 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).

Note:…

Application to your circumstances

Basic conditions one and two

5. The Property (comprising the Land, Building and Extensions) owned by Company A (deemed under former subsection 160ZZS(1) of the ITAA 1936 to have been acquired by Company A in the year ending 30 June 1986), falls within the definition of a CGT asset (subsection 108-5(1)).

6. Company A have advised that they intend to sell the Property to the trustee (‘the Trustee’) of a self-managed superannuation fund in the income years ending 30 June 20XX or 30 June 20XX, and that it will receive capital proceeds from the sale of the Property which will exceed the cost base of the Property.

7. If Company A sells the property to the Trustee, CGT Event A1 will happen (subsection 104-10(1)).

8. If the capital proceeds from the sale of the Property exceed the cost base of the Property then Company A will make a capital gain from the disposal (subsection 104-10(4)).

9. Accordingly, if Company A proceeds with the intended sale, the basic conditions in paragraphs 152-10(1)(a) and (b) will be satisfied.

Basic condition three

10. Company A have advised that at the time of the intended sale of the Property, it will satisfy the maximum net asset value test under section 152-15.

11. Accordingly, if at the time of the sale of the Property, Company A meets the ‘maximum net asset test’ under section 152-15, subparagraph 152-10(1)(c)(ii) will apply, and therefore the basic condition in paragraph 152-10(1)(c) will be satisfied.

Basic condition four

12. The fourth basic condition set out in section 152-10 that must be satisfied for a taxpayer to be eligible for relief under Division 152 is that the CGT asset satisfies the active asset test.

13. The active asset test is contained in section 152-35:

SECTION 152-35 Active asset test

152-35(1)

A *CGT asset satisfies the active asset test if:

(a) you have owned the asset for 15 years or less and the asset was an *active asset of yours for a total of at least half of the period specified in subsection (2); or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the period specified in subsection (2).

152-35(2)

The period:

(a) begins when you *acquired the asset; and

(b) ends at the earlier of:

(i) the *CGT event; and

(ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

14. The meaning of ‘active asset’ is defined in section 152-40:

SECTION 152-40 Meaning of active asset

152-40(1)

A *CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a *business that is carried on (whether alone or in partnership) by: (i) you; or (ii) your *affiliate; or (iii) another entity that is *connected with you; or

15. The Property (comprising the Land, Building and Extensions) is a single CGT asset – refer reasoning in Questions 1 to 4 above.

16. For CGT purposes, the property is deemed to have been ‘acquired’ in the year ending 30 June 1986 – refer reasoning in Question 1 above.

17. Company A state that it used the Property (initially comprised of the Land and Building) in the course of carrying out its industrial products business (‘the Business’) from when it purchased the Land and constructed the Original Building in the 1980’s, until it sold the business in the year ending 30 June 20XX.

18. Therefore, the Property was an active asset of Company A for a period of greater than 15 years from the time that the Property was deemed to be have been acquired for CGT purposes in the year ending 30 June 19XX until the date that it sold the business in the year ending 30 June 20XX.

19. Accordingly, the active asset test under section 152-35 will be satisfied as Company A have owned the Property for more than 15 years, and the Property was an active asset for more than 7.5 years during the period beginning when it is deemed to have acquired the Property (in the year ending 30 June 19XX) and ending at the time that it proposes to sell the property (in the year ending 30 June 20XX or 30 June 20XX).

Conclusion

20. If Company A proceed with the sale of the property to the Trustee in the years ending 30 June 20XX or 30 June 20XX, it will meet the four basic conditions for relief under section 152-10 of Subdivision 152-A, and accordingly will be eligible to apply the small business 50% reduction under section 152-205 to the relevant amount of the capital gain.

Question 7

Will Company A be eligible to choose to apply the small business retirement exemption pursuant to subsection 152-305(2) of the ITAA 1997 to disregard, and not include in its assessable income an amount of up to $XXX, representing part of the capital gain which will arise if Company A disposes of the Property (comprising the Land, Building and Extensions) to the trustee (‘the Trustee) for a self-managed superannuation fund, in the income years ending 30 June 20XX or 30 June 20XX?

Summary

If Company A proceed with the sale of the Property to the Trustee in the years ending 30 June 20XX or 30 June 20XX, it will satisfy all of the requirements under subsection 152-305(2) of the ITAA 1997, and accordingly will be eligible to apply the small business retirement exemption under Subdivision 152-D to the relevant amount of the capital gain.

Detailed reasoning

Subdivision 152-D – Small business retirement exemption

1. Subdivision 152-D of the ITAA 1997 sets out the requirements that must be satisfied for a taxpayer to be eligible to qualify for the small business retirement exemption.

2. Under Subdivision 152-D a company can choose to disregard all or part of a capital gain if specified requirements are satisfied.

3. Subsection 152-305(2) sets out the three requirements that a company must satisfy to be able to choose to choose to disregard all or part of a capital gain under Subdivision 152-D:

A company or a trust (except a public entity - see subsection (3)) can also choose to disregard such an amount if:

(a) the basic conditions in Subdivision 152-A are satisfied for the *capital gain; and

(c) the company or trust conditions in section 152-325 are satisfied.

Note: Section 103-25 tells you when the choice must be made.

Basic conditions in Subdivision 152-A

4. Paragraph 152-305(2)(a) provides that the basic conditions in Subdivision 152-A of the ITAA 1997 must be satisfied for the capital gain.

5. Section 152-10 of Subdivision 152-A sets out the basic conditions for relief under Division 152.

Application to your circumstances

6. Based on the information provided by the applicant, Company A will meet the basic conditions for relief under section 152-10 of Subdivision 152-A. Refer detailed reasoning under Question 6.

Conclusion

7. Accordingly, Company A will satisfy the basic conditions in Subdivision 152-A.

Other company and trust conditions

8. In order to be able to make a choice to access the retirement exemption, in addition to satisfying the relevant basic conditions (as discussed above), companies or trusts (excluding public entities) must:

● have at least one significant individual just before the CGT event;

● keep a written record of the amount they choose to disregard (the exempt amount); and if there is more than one CGT concession stakeholder, a written record of each stakeholder’s percentage of the exempt amount (see subsection 152-315(5)). The company or the trust can determine the percentage of the exempt amount to be attributed to each CGT concession stakeholder having regard to each stakeholder’s $XXX lifetime CGT retirement exemption limit. The percentage does not have to be equal to the stakeholder’s interest in the company or the trust (in contrast to the 15 year exemption) and nil percentages may be included so long as the total allocation is XX%;

● make a payment to at least one of the CGT concession stakeholders worked out by reference to each individual’s percentage of the exempt amount by the later of 7 days after the choice is made to disregard the capital gain and 7 days after the capital proceeds from the CGT event are received; and

● where a CGT concession stakeholder is under 55 years of age just before receiving the payment, an amount equal to that payment must be contributed immediately on their behalf to a complying superannuation fund or retirement saving account. Failure to make a payment immediately into a complying superannuation (or similar) fund will mean the conditions are not satisfied and the retirement exemption will not be available. If the stakeholder was 55 or more there is no requirement to make this contribution.

Significant individual test

9. Paragraph 152-305(2)(b) provides that the entity must satisfy the significant individual test under section 152-50 of Subdivision 152-A.

10. Section 152-50 provides that an entity (in this case a company) satisfies the significant individual test if the entity has a least one significant individual just before the CGT event.

11. Under section 152-55, 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 20%.

12. An entity’s small business participation percentage in another entity at a time is the sum of the entity’s direct small business participation percentage, and indirect small business participation percentage in the other entity at that time (section 152-65).

13. The method for calculating an entity’s direct and indirect small business participation percentage in a trust is outlined in sections 152-70 and 152-75.

14. Subsection 152-70(1) provides that an entity’s direct small business participation percentage in a company is the smaller of the percentage that the entity has because of holding the legal and equitable interests in shares in the company of:

a) the voting power in the company

b) any dividend that the company may pay

c) any distribution of capital that the company may make.

15. Section 152-75 sets out how to calculate an entity’s indirect small business participation percentage:

Work out the indirect small business participation percentage that an entity (the holding entity) holds at a particular time in another entity (the test entity) by multiplying:

(a) the holding entity's *direct small business participation percentage (if any) in another entity (the intermediate entity) at that time; by

(b) the sum of:

(i) the intermediate entity's direct small business participation percentage (if any) in the test entity at that time; and

(ii) the intermediate entity's indirect small business participation percentage (if any) in the test entity at that time (as worked out under one or more other applications of this section).

NOTE: When testing an intermediate entity’s indirect small business participation percentage in another entity, the intermediate entity becomes the holding entity.

If there is more than one intermediate entity to which paragraph (1)(a) applies at that time, the holding entity's indirect small business participation percentage is the sum of the percentages worked out under subsection (1) in relation to each of those intermediate entities.

Application to your circumstances

16. Company A will satisfy the significant individual test if Individual 1 qualifies as a ‘significant individual’ in Company A just before the sale of the Property (section 152-50).

17. Individual 1 will qualify as a ‘significant individual’ in Company A if, at that time, Individual 1 has a ‘small business participation percentage’ in Company A of at least 20% (section 152-55).

18. The applicant has provided information in relation to Individual 1’s small business participation percentage in Company A which can be summarised as follows:

● Individual 1’s direct small business participation percentage in Company A is XX% A

● Individual 1’s direct small business participation percentage in Company C is XX% B

● Company C’s direct small business participation percentage in Company A is XX% C

● Company C’s direct small business participation percentage in Company B is XX% D

● Company B’s direct small business participation percentage in Company A is XX% E

19. Accordingly, Individual 1’s small business participation percentage in Company A under sections 152-65, 152-70 and 152-75 is 25%, calculated as follows:

A + (B x (C +D) x E)

= 0% + (50% x (0% + 50%) x 100%)

= 0% + (50% x 50% x 100%)

= 0% + 25%

= 25%

20. Therefore, assuming Individual 1’s small business participation percentage in Company A remains at 25%, Individual 1 will be a ‘significant individual’ of Company A just before Company A disposes of the Property as Individual 1 will have a ‘small business participation percentage’ in Company A of at least 20%.

Conclusion

21. Accordingly, Company A will satisfy the ‘significant individual test’ as it will have at least one ‘significant individual’ just before the CGT event (that is, the sale of the Property)(section 152-50).

Company and trust conditions in section 152-325

22. Paragraph 152-305(2)(c) provides that the company or trust must satisfy the company or trust conditions in section 152-325.

23. The relevant provisions of section 152-325 in the current case are as follows:

Company or trust to make payments

A company or trust must make a payment (whether directly or indirectly through one or more interposed entities) to at least one of its *CGT concession stakeholders if:

(a) …; or

(b) the company or trust receives an amount of *capital proceeds from a *CGT event for which it makes a choice under this Subdivision.

The payment must be made by:

(a) …

(b) otherwise - the later of:

(i) 7 days after the company or trust makes the choice; and

(ii) 7 days after the company or trust receives an amount of *capital proceeds from the *CGT event.

The amount of the payment, or the sum of the amounts of the payments, required to be made under this section must be equal to the lesser of:

(a) either:

(i) …; or

(ii) otherwise - the amount of *capital proceeds received; and

(b) the relevant *CGT exempt amount.

…

24. Section 152-60 provides that an individual is a CGT concession stakeholder of a company or trust at a time if the individual is:

a) a significant individual in the company or trust; or

b) a spouse of a significant individual in the company or trust, if the spouse has a small business participation percentage in the company or trust at that time that is greater than zero.

Application to your circumstances

25. Company A will satisfy the relevant company conditions in section 152-325 if the following conditions are met:

a) Condition 1: Company A makes a payment to a CGT concession stakeholder

b) Condition 2: Company A makes the payment within the timeframes set out in subsection 152-325(4)

c) Condition 3: The amount of the payment complies with subsection 152-325(5).

Condition 1 – Payment to a CGT concession holder

26. Company A intend to make a payment to Individual 1 (‘the Payment’).

27. Individual 1 will be a ‘CGT concession stakeholder’ in Company A just prior to the CGT event (that is the sale of the Property), as Individual 1 will be a ‘significant individual’ of Company A at that time (section 152-60).

28. Accordingly, Company A will satisfy Condition 1.

Condition 2 – Payment made within relevant timeframe

29. The applicant states that Company A will make the Payment to Individual 1 within the timeframe set out in subsection 152-325(4), that is, the later of:

a) 7 days after Company A makes a choice under subsection 152-205(2); and

b) 7 days after Company A receives the capital proceeds from the sale of the Property to the Trustee.

30. Accordingly, Company A will satisfy Condition 2.

Condition 3 – Amount of the payment

31. The applicant states that the amount of the Payment, or the sum of the amounts of the payment that Company A will make to Individual 1 pursuant to subsection 152-325(5) will be equal to the lesser of:

a) the amount of the capital proceeds received by Company A from the sale of the Property to the Trustee; and

b) the relevant CGT exempt amount.

32. Accordingly, Company A will satisfy Condition 3.

Conclusion

33. Company A will satisfy the three relevant company conditions in section 152-325.

34. As Individual 1 is not under 55 years of age, subsection 152-325(7) does not apply to require Company A to make the relevant payment to Individual 1 (the CGT concession stakeholder) by contributing it for Individual 1 to a complying superannuation fund or an RSA in respect of Individual 1.

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