1051646965234 | Legal database

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You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private advice

Authorisation Number: 1051646965234

Date of advice: 12 March 2020

Ruling

Subject: CGT- Small business concessions

Companies

Head Company

Sub Co 1

Sub Co 2

Shareholders

Five shareholders

Issue 1

Application of Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) to the profit from the sale of the Business

Question 1

Will Sub Co 1 satisfy the basic conditions in subsection 152-10(1) of the ITAA 1997 to be eligible to claim small business relief under Division 152 of the ITAA 1997?

Answer

Yes

Question 2

Will Head Company satisfy the basic conditions in subsection 152-10(1) of the ITAA 1997 to be eligible to claim small business relief under Division 152 of the ITAA 1997?

Answer

Yes

Question 3

Is Sub Co 1 entitled to disregard the capital gain made from the sale of its portion of the Business pursuant to section 152-110 of the ITAA 1997?

Answer

Yes

Question 4

Is Head Company entitled to disregard the capital gain made from the sale of its portion of the Business pursuant to section 152-110 of the ITAA 1997?

Answer

Yes

Question 5

Will section 152-125 of the ITAA 1997 apply to exempt the following payments made from the disregarded capital gain made by Sub Co 1 from the sale of its share of the Business:

(a) dividend from Sub Co 1 to Head Company

(b) dividend from Head Company to its shareholders within two years of the sale of the Business.

Answer

Yes

Question 6

Will section 152-125 of the ITAA 1997 apply to exempt the payments made from the disregarded capital gain made by Head Company from the sale of its share of the Business:

(a) dividend from Head Company to its shareholders within two years of the sale of the Business.

Answer

Yes

This ruling applies for the following period(s)

1 July 20XX to 30 June 20XX

The scheme commences on

Date sale contract was signed.

Relevant facts and circumstances

The Business is owned by Head Company, Sub Co 1 and Sub Co 2. It has been operating as a Business since pre-CGT and consists of land used in the business, a main building and a large parking area.

Shareholdings

Head Company was established pre-CGT with four Class A shareholders, one of whom was Taxpayer A. According to the Articles of Head Company, Class A shares had voting, dividend and capital rights and provided that if Class A shares were transferred to any other shareholder they became Class B shares which had rights to capital and dividends only.

Pre-CGT, a number of Class C redeemable preference shares were issued to four members of the Taxpayer A's family that were later redeemed.

Pre-CGT, Taxpayer A acquired the other Class A shares leaving him with the only remaining Class A share and the owner of three Class B shares.

Post CGT a C class share was allotted to Taxpayer A's second wife, Taxpayer B. You state that this share was held by her on bare trust for Taxpayer A. Whilst no deed of trust could be found, you state that prior to the Corporations law changes in 2000 a company required two shareholders and to satisfy this requirement in cases where there was 100% sole beneficial ownership one share would be issued to another person on bare trust.

At Taxpayer A's death on XX/XX/20XX all the shares he held in Head Company passed to Taxpayer B resulting in the remaining Class A share converting to a Class B share. Subsequently, the four Class B shares and one Class C share were converted into five ordinary shares. Sub Co 2 and Sub Co 1 were both incorporated pre-CGT. Head Company owns 100% of each entity, apart from one share owned by Taxpayer B on trust for Head Company in both Sub Co 2 and Sub Co 1.

Sub Co 2 has many shares of which one was held by Taxpayer B and the remainder by Head Company.

Sub Co 1 has many shares of which one was held by Taxpayer B and the remainder by Head Company.

Taxpayer B died after Taxpayer A. On her death, all shares previously held by Taxpayer B were then held by the legal personal representatives in their capacity as trustees of her estate.

The two shares in Sub Co 1 and Sub Co 2 that were held by Taxpayer B before her death were transferred by the executors of her estate to Head Company sometime after.

Taxpayer B's Will

The two trustees of the Estate of Taxpayer B were granted letters of administration five months after her death.

Pursuant to the Will, there are personal bequests of certain assets. The bulk of the real and personal property is to be sold and held in trust equally, as tenants in common, between the remaining five beneficiaries. The trustees exercised their discretion to postpone the sale of the real property and to carry on the Business. All personal bequests, funeral and testamentary expenses have been paid and administration is complete apart from the sale of the Business and distribution of the proceeds. Any income or net capital gain derived by the trustees is to be distributed equally to the beneficiaries.

To finalise administration of Taxpayer B's will a 'Deed of Distribution, Transfer and Vesting' provided for the remaining assets in the Estate to be distributed in equal shares amongst the beneficiaries. This was achieved by transferring the two shares formerly held by Taxpayer B on trust for Head Company to Head Company and transferring the five Head Company shares to each of the five beneficiaries of the Estate.

The five beneficiaries became the shareholders of Head Company. In accord with the Will each shareholder then held one equal share in Head Company.

Each shareholder is over the age of 55 and if not already recently retired, seeks to retire after the final distribution from the Estate of Taxpayer B.

The Business continued operating until its sale on XX/XX/20XX when it was sold in its entirety by Head Company and Sub Co 1 to the Buyer for $XX million (excluding GST).

Under the Contract of Sale, the Buyer acquired the Business which means collectively the businesses operated by Sub Co1 and Sub Co 2 together with the benefit of the liquor licence that operated at and from the land immediately prior to settlement. The contract included Property Chattels.

Sub Co 1 passed its share of the sale to Head Company as a dividend.

Operations

Head Company carries on no business operations and derives its income from dividends paid to it by Sub Co 1 and Sub Co 2. No dividends were received in the 20XX income year from the two entities.

Head Company and Sub Co 1 each own half of the Business's land. Head Company's land, which is part of the Business, is used by Sub Co 1 in its day to day operations. Sub Co 1 has not paid rent to Head Company for the use of its land.

Since pre-CGT, Sub Co 1 has operated the Business. Sub Co 1 owns the land on which the buildings are constructed. Sub Co 2 paid for improvements comprising a building and carpark which cost $ X million and certain other improvements in 199X. Sub Co 2 derived its income from leasing out the main building to third parties for approximately $ XXX per annum, which ceased a year ago. It owns the building but no capital gain will arise as the market value of the building is no greater than its cost. No rental income is paid by Sub Co 2 to Sub Co 1.

Other information

The following additional information has been provided:

(a) Head Company, Sub Co 1 and Sub Co 2 do not have any control or interest in any other separate business entity.

(b) none of the five shareholders operate any businesses as a sole trader.

(d) two shareholders are not affiliates of Sub Co 1, Head Company or Sub Co 2 and have not operated any business on any of the lands.

(e) three shareholders are current employees of Sub Co 1.

(f) the 20XX financials for Sub Co 1, Head Company and Sub Co 2.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-15(3)

Income Tax Assessment Act 1997 Subsection 8-1(1)

Income Tax Assessment Act 1997 Paragraph 8-1(2)(c)

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Subsection 40-30(1)

Income Tax Assessment Act 1997 Subsection 40-285(1)

Income Tax Assessment Act 1997 Section 128

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Division 152-A

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 Paragraph 152-10(1)(c)

Income Tax Assessment Act 1997 Paragraph 152-10(1)(d)

Income Tax Assessment Act 1997 Subsection 152-10(1AA)

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

Income Tax Assessment Act 1997 Subsection 152-40(1)

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 Subsection 152-70(1) table item 1

Income Tax Assessment Act 1997 Section 152-75

Income Tax Assessment Act 1997 Subsection 152-75(1)

Income Tax Assessment Act 1997 Division 152-B

Income Tax Assessment Act 1997 Section 152-110

Income Tax Assessment Act 1997 Section 152-125

Income Tax Assessment Act 1997 Paragraph 152-125(1)(b)

Income Tax Assessment Act 1997 Paragraph 152-125(1)(c)

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

Income Tax Assessment Act 1997 Subsection 152-125(3)

Income Tax Assessment Act 1997 Paragraph 152-125(3)(a)

Income Tax Assessment Act 1997 Subsection 152-125(4)

Income Tax Assessment Act 1997 Division 328

Income Tax Assessment Act 1997 Subdivision 328-C

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Subsection 328-110(1)

Income Tax Assessment Act 1997 Subsection 328-115(1)

Income Tax Assessment Act 1997 Subsection 328-115(2)

Income Tax Assessment Act 1997 Subsection 328-115(3)

Income Tax Assessment Act 1997 Subsection 328-125(1)

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

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

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

Reasons for decision

All references to legislation are to provisions in the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Will Sub Co 1 satisfy the basic conditions in subsection 152-10(1) of the ITAA 1997 to be eligible to claim small business relief under Division 152 of the ITAA 1997?

Summary

The basic conditions in subsection 152-10(1) have been satisfied by Sub Co 1, as:

(a) CGT event A1 happened on X/XX/20XX when a Contract of Sale was entered into

(b) the event resulted in a capital gain being made

(d) the CGT assets satisfy the active asset test.

Detailed Reasoning

1. To be eligible to claim small business relief under Division 152, Sub Co 1 must satisfy the basic conditions in subsection 152-10(1):

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

(b) the event would have resulted in a capital gain

(i) you are a CGT small business entity for the income year

(ii) you satisfy the maximum net asset value test

(iii) the conditions 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.

2. CGT event A1 happened on X/XX/20XX when Sub Co 1 and Head Company entered into a Contract of Sale to sell the Business that resulted in a capital gain being made by both companies.

3. You are a 'CGT small business entity' for an income year if:[1]

(a) you are a small business entity for the income year, and

(b) you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

4. You are a 'small business entity' for an income year (the current year) if:[2]

(a) you carry on a business in the current year, and

(b) one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than [$2 million]

(ii) your aggregated turnover for the current year is likely to be less than [$2 million].

5. As Sub Co 1 runs and operates the Business it would be considered to be carrying on a business in the relevant income year. It therefore has to be determined if the aggregated turnover requirement has been satisfied.

6. Your aggregated turnover for an income year is the sum of the relevant annual turnovers.[3]

7. The relevant annual turnovers are:[4]

(a) your annual turnover for the income year, and

(b) the annual turnover for the income year of any entity that is connected with you at any time during the income year, and

(c) the annual turnover for the income year of any entity that is an affiliate of yours at any time during the income year.

8. Your aggregated turnover for an income year does not include the following:[5]

(a) amounts derived in the income year by you or a relevant entity from dealings between you and the relevant entity while the relevant entity is connected with you or is your affiliate,

(b) amounts derived in the income year by you or a relevant entity from dealings between you and another relevant entity while each relevant entity is connected with you or is your affiliate,

(c) amounts derived in the income year by a relevant entity while the relevant entity is not connected with you or is not your affiliate.

9. Subsection 328-125(1) states:

An entity is connected with another entity if:

(a) either entity controls the other entity in a way described in this section; or

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

10. Subsection 328-125(2) provides the following control test for entities that are not discretionary trusts:

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.

11. Head Company owns 100% of the shares in Sub Co 1 and Sub Co 2. Therefore, both of these entities are connected entities to Sub Co 1.

12. An individual or a company is an affiliate of yours if the individual or company acts or could reasonably be expected to act, in accordance with your direction or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.[6]

13. Three shareholders are employees of Sub Co 1. Two shareholders do not have any business interests with Sub Co 1, Sub Co 2 or Head Company. Also, no shareholder operates any business in their own right. You have also advised that Sub Co 1, Sub Co 2 and Head Company do not control any other individual or company running a business. Therefore, based on the information provided, none of the shareholders is an affiliate of Sub Co 1, Sub Co 2 or Head Company. There is no additional annual turnover to include in Sub Co 1's aggregated turnover from any affiliates.

14. In determining Sub Co 1's aggregated turnover, the dividends paid between the connected entities is excluded.[7] Therefore, the only annual turnover to be included is Sub Co 1's annual turnover for the 20XX income year and Sub Co 2's annual turnover for the 20XX income year. Sub Co 1 and Sub Co 2's trial balances for the 20XX income year show an aggregated turnover of less than $2 million. Therefore, Sub Co 1 would meet the requirement to be a CGT small business entity.

15. The final requirement in subsection 152-10(1) is that the CGT asset satisfies the active asset test.

16. A CGT asset is an active asset at a time, if at that time:[8]

(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 you, your affiliate, or another entity that is connected with you, or

(b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you.

17. 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 7.5 years during the period specified in

18. Under the Contract of Sale, the Buyer acquired the Business which means collectively the businesses operated by Sub Co1 and Sub Co 2 together with the benefit of the liquor licence that operated at and from the land immediately prior to settlement for $XX million (excluding GST).

19. Sub Co 1 and Head Company acquired the land and facilities for the Business pre-CGT. Improvements were made to the Business in 199X. The Trustees of the testamentary trust continued to operate the business until its sale on X/XX/20XX. All connected entities held assets that were continuously, fully employed in the Business.

20. The CGT assets the Buyer acquired from Sub Co 1 and Head Company meet the requirements to be active assets, as they were either used or inherently connected in carrying on the Business. Further, as the active assets were owned for more than 15 years the active asset test would also be satisfied. Accordingly, Sub Co 1 has met the final basic condition in paragraph 152-10(1)(d).

Question 2

Will Head Company satisfy the basic conditions in subsection 152-10(1) of the ITAA 1997 to be eligible to claim small business relief under Division 152 of the ITAA 1997?

Summary

The basic conditions in subsection 152-10(1) have been satisfied by Head Company as:

(a) CGT event A1 happened on X/XX/20XX when a Contract of Sale was entered into

(b) the event resulted in a capital gain being made

(d) the CGT assets satisfy the active asset test.

Detailed Reasoning

21. To be eligible to claim small business relief under Division 152, Head Company must satisfy the following relevant basic conditions in section 152-10:

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

(b) the event would have resulted in a capital gain

(i) you are a CGT small business entity for the income year

(ii) you satisfy the maximum net asset value test

(iii) the conditions 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.

22. CGT event A1 happened on X/XX/20XX when Sub Co 1 and Head Company entered into a Contract of Sale to sell the Business that resulted in a capital gain being made by both companies.

23. You are a 'CGT small business entity' for an income year if:[10]

(a) you are a small business entity for the income year, and

(b) you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

24. You are a 'small business entity' for an income year (the current year) if:^[11]

(a) you carry on a business in the current year, and

(b) one or both of the following applies:

(i) you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than [$2 million]

(ii) your aggregated turnover for the current year is likely to be less than [$2 million].

25. As Head Company receives dividends from its two subsidiaries (Sub Co 1 and Sub Co 2) it would be considered to be carrying on a business.[12] It therefore has to be determined if the aggregated turnover requirement has been satisfied.

26. Your aggregated turnover for an income year is the sum of the relevant annual turnovers.[13]

27. The relevant annual turnovers are:[14]

(a) your annual turnover for the income year, and

(b) the annual turnover for the income year of any entity that is connected with you at any time during the income year, and

(c) the annual turnover for the income year of any entity that is an affiliate of yours at any time during the income year.

28. Your aggregated turnover for an income year does not include the following:[15]

(a) amounts derived in the income year by you or a relevant entity from dealings between you and the relevant entity while the relevant entity is connected with you or is your affiliate,

(b) amounts derived in the income year by you or a relevant entity from dealings between you and another relevant entity while each relevant entity is connected with you or is your affiliate,

(c) amounts derived in the income year by a relevant entity while the relevant entity is not connected with you or is not your affiliate.

29. As advised in Question 1, section 328-115 sets out when an entity is connected with another entity and asks whether an entity controls another entity. A company is said to control another entity when it has a control percentage of at least 40%.

30. Head Company owns 100% of the shares in Sub Co 1 and Sub Co 2. Sub Co 1 and Sub Co 2 are both connected entities to Head Company.

31. An individual or a company is an affiliate of yours if the individual or company acts or could reasonably be expected to act, in accordance with your direction or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.[16]

32. Three shareholders are employees of Sub Co 1. Two shareholders do not have any business interests with Sub Co 1, Sub Co 2 or Head Company. Also, no shareholder operates any business in their own right. You have also confirmed that Sub Co 1, Sub Co 2 and Head Company do not control any other individual or company running a business. Therefore, on the above facts, none of Head Company's shareholders is an affiliate of Sub Co 1, Sub Co 2 or Head Company. There is no additional annual turnover to include in Head Company's aggregated turnover from any affiliates.

33. Head Company receives its income as dividends from Sub Co 1 and Sub Co 2. In determining Head Company aggregated turnover, the dividends paid between the connected entities is excluded.[17] Therefore, the only annual turnover to be included is Sub Co 1's and Sub Co 2's annual turnover. Sub Co 1 and Sub Co 2's trial balances for the 2019 income year show an aggregated turnover of less than $2 million. Therefore, Head Company would meet the requirement to be a CGT small business entity.

34. The final requirement in subsection 152-10(1) is that the CGT asset satisfies the active asset test.

35. A CGT asset is an active asset at a time, if at that time:[18]

36. 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 7.5 years during the period specified in

37. According to the Contract of Sale, the Buyer acquired the Business which means collectively the businesses operated by Sub Co1 and Sub Co 2 together with the benefit of the liquor licence that operated at and from the land immediately prior to settlement for $ XX million (excluding GST).

38. Sub Co 1 and Head Company acquired the land and facilities for the Business pre-CGT. Improvements were made to the Business in 199X. The Trustees of the testamentary trust continued to operate the Business until its sale on X/XX/20XX. All connected entities held assets that were continuously, fully employed in the Business.

39. The CGT assets the Buyer acquired from Sub Co 1 and Head Company meet the requirements to be active assets, as they were either used or inherently connected in carrying on the Business. Further, as the active assets were owned for more than 15 years the active asset test would also be satisfied. Accordingly, Head Company has met the final basic condition in paragraph 152-10(1)(d).

Question 3

Is Sub Co 1 entitled to disregard the capital gain made from the sale of its portion of the Business pursuant to section 152-110 of the ITAA 1997?

Summary

As Sub Co 1 meets all four conditions in subsection 152-110(1) Sub Co 1 is entitled to disregard the capital gain made from the sale of its portion of the Business.

Detailed Reasoning

40. A CGT small business entity can disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met.[20] For a company, these conditions are set out in subsection 152-110(1) as follows:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain

(b) the entity continuously owned the CGT asset for the 15 year period ending just before the CGT event

(c) the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the company owned the CGT asset, and

(d) the significant individual just before the CGT event was either:

(i) over 55 and the event happened in connection with the individual's retirement, or

(ii) permanently incapacitated.

41. If the entity derives ordinary income or statutory income from a CGT event which would be covered by the 15 year exemption that income is neither assessable income nor exempt income.[21] However, this does not apply to income derived by a company as a result of a balancing adjustment event occurring for a depreciating asset whose decline in value was worked out under Division 40 or a deduction calculated under Division 328.[22]

42. The Contract of Sale includes a list of Property Chattels which would fall within the meaning of a depreciating asset in subsection 40-30(1). A balancing adjustment event would occur when the Property Chattels are sold.[23] Therefore, any balancing adjustment that is assessable under subsection 40-285(1) is not excluded under the 15 year exemption.

43. Sub Co 1 will meet the first condition in paragraph 152-110(1)(a), as set out in Question 1.

44. In relation to the second condition in paragraph 152-110(1)(b), as Sub Co 1 has owned its portion of the Business pre-CGT it would meet this condition because it has continuously owned the Business for more than the 15 year period. Whether the intangibles held by Sub Co 1 and Head Company in relation to the Business that was sold have been held continuously for the 15 year period is not known. It is noted that no purchase price seems to have been allocated to the intangibles sold.[24]

45. The third condition in paragraph 152-110(1)(c) requires there to be a significant individual. 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%. Table item 1 of subsection 152-70(1) states that an entity's small business participation percentage in a company is determined by its 'legal and equitable interest in the shares of the company'.

46. Sub Co 1 is owned 100% by Head Company. When Head Company and Sub Co 1 were incorporated pre-CGT, Taxpayer A had a 25% shareholding in Head Company. Then again pre-CGT, Taxpayer A owned all four shares (i.e. 100%) in Head Company. Later, post-CGT a C Class share was issued to Taxpayer B on trust for Taxpayer A. On his death on XX Month 20XX, Taxpayer A's spouse (Taxpayer B) inherited 100% of the shares in Head Company, i.e. all five shares. At her death on X/XX/20XX, 100% of the legal and equitable interest in the shares of Head Company and thus Sub Co 1 passed to her Estate. To satisfy this condition, it does not need to be the same significant individual at all times.[25] Both Taxpayer A and Taxpayer B were significant individuals of Sub Co 1 through their 100% interest in Head Company for a period of longer than 15 years (in accordance with sections 152-75 and 152-65).

47. The four Class B shares and the one Class C share were subsequently converted to five ordinary shares in Head Company. The executors of the Estate distributed the five shares to the five beneficiaries on 29 December 2019 which provided each beneficiary with one shareholding and a 20% interest in Head Company and therefore Sub Co 1. Section

48. 152-50 sets the significant individual test for an entity as at least one significant individual just before the CGT event. An individual becomes a significant individual of a company if just before the CGT event the individual has a small business participation percentage in the company of 20%.[26]

49. The small business participation percentage for an individual just before the CGT event can be either direct or indirect according to section 152-65. Table item 1 in subsection 152-70(1) explains that the individual's interest in a company is the percentage the individual has because of holding the legal and equitable interests in the shares of the company. Each shareholder in Head Company has a 20% legal and equitable interest in the Head Company but not directly in Sub Co 1 which is owned 100% by Head Company. However, subsection 152-75(1) determines an indirect small business participation percentage for an individual 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.

50. The holding entity is the 20% shareholder in Head Company which is then the intermediate entity for the test entity, Sub Co 1. As Head Company has a 100% ownership of Sub Co 1 and each shareholder a 20% interest in Head Company, each shareholder has an indirect small participation percentage in Sub Co 1 of 20%. Therefore each shareholder is a significant individual of Sub Co 1 just before the CGT event that occurred on X/XX/20XX.

51. Sub Co 1 therefore satisfies the significant individual test in section 152-50 just before the golf course was sold.

52. In relation to the final condition in paragraph 152-110(1)(d), each of the five shareholders in Head Company and therefore Sub Co 1 is over 55 and plans to retire on the proceeds of the sale of the Business by Sub Co 1 and Head Company.

53. Therefore, as Sub Co 1 has met all the conditions in section 152-110(1), Sub Co 1 is entitled to disregard the capital gain made from the sale of its portion of the Sub Co 1's Business.

Question 4

Is Head Company entitled to disregard the capital gain made from the sale of its share of the Business pursuant to section 152-110 of the ITAA 1997?

Summary

Head Company owns 100% of Sub Co 1. The same conditions as apply to the proceeds from the sale of the Business by Sub Co 1, also applies to Head Company when it sells its portion of the Business.

Detailed Reasoning

54. For the reasons set out in Question 3, the conditions in subsection 152-110(1) are also satisfied for Head Company. Therefore, Head Company is entitled to disregard the capital gain made from the sale of its portion of the Business.

Question 5

Will section 152-125 of the ITAA 1997 apply to exempt the following payments made from the disregarded capital gain made by Sub Co 1 from the sale of its share of the Business:

(a) dividend from Sub Co 1 to Head Company

(b) dividend from Head Company to the five shareholders within two years of the sale of the Business.

Summary

As the capital gain made by Sub Co 1 on the sale of its portion of the Business will be disregarded under the 15 year exemption, the sale proceeds are considered to be an exempt amount under section 152-125 when paid as a dividend to Head Company. The five shareholders of Head Company are considered to be CGT concession stakeholders as each is a significant individual by virtue of a 20% direct small business participation percentage. As a CGT concession stakeholder, each shareholder is entitled to receive 20% of the exempt amount determined in accordance with subsection 152-125(2). Sub Co 1 and Head Company are able to disregard the total amount of payments that form the exempt amount, made to the shareholders who are CGT concession stakeholders when determining their taxable income.

Detailed Reasoning

55. As it has been determined that the capital gain made by Sub Co 1 will be disregarded under the 15 year exemption the amount of the capital gain is taken to be an exempt amount under section 152-125. Any distributions made of that exempt amount to a CGT concession stakeholder is:[27]

· not included in the assessable income of the CGT concession stakeholder[28]

· not considered a dividend or frankable distribution,[29] and

· not deductible to the company or trust[30]

if certain conditions are satisfied.

56. The conditions are:

· the company or trust must make a payment (whether directly or indirectly through one or more interposed entities) within two years after the CGT event that resulted in the capital gain[31] or, in appropriate circumstances, such further time as allowed by the Commissioner[32]

· the payment must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event,[33] and

· 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.[34]

57. Section 152-60 defines a CGT concession stakeholder as a significant individual in the company or a spouse of the individual who has a small business participation percentage greater than zero in their own right. Each of the five shareholders is entitled to a 20% share of the proceeds from the sale of the Business. An individual is a significant individual if the individual has a small business participation percentage (direct and indirect interests) in Sub Co 1 of at least 20%.[35] Each of the five shareholders has an indirect small business participation percentage of 20% in Sub Co 1. Therefore, each shareholder is a CGT concession stakeholder of Sub Co 1.

58. Sub Co 1 will pay its exempt amount (adjusted share of the sale proceeds of the Business) to Head Company as a dividend. Paragraph 152-125(1)(b) permits payments of the exempt amount made within two years of the sale of the Business to a CGT concession stakeholder to be made through one or more interposed entities to maintain its exempt status. Paragraph 152-125(3)(a) specifically includes a dividend in the exempt amount if it does not exceed the amount calculated under subsection 152-25(2) to determine the CGT stakeholders exempt amount. Head Company owns 100% of the shares in Sub Co 1 and the exempt amount will pass through Head Company to the shareholders who are the five CGT concession stakeholders of Sub Co 1.

59. As a CGT concession stakeholder, each shareholder is entitled to receive 20% of the exempt amount when the calculation in subsection 152-125(2) is applied to the amount. Sub Co 1 and Head Company are able to disregard the total amount of payments that form the exempt amount, made to the shareholders who are CGT concession stakeholders when determining their taxable income. Other income derived by Sub Co 1 from its business operations during the 20XX year will not be exempt income to Sub Co 1.

Question 6

Will section 152-125 of the ITAA 1997 apply to exempt the following payments made from the disregarded capital gain made by Head Company from the sale of its share of the Business:

(a) dividend from Head Company to the shareholders within two years of the sale of the Business.

Summary

As the capital gain made by Head Company on its sale of the potion of the Business will be disregarded under the 15 year exemption, it is considered to be an exempt amount under section 152-125. The five shareholders are considered to be CGT concession stakeholders as they each have a 20% direct small business participation percentage in Head Company. As a CGT concession stakeholder, each shareholder is entitled to receive 20% of the exempt amount determined in accordance with subsection 152-125(2). Head Company is able to disregard the total amount of payments that form the exempt amount, made to the shareholders who are CGT concession stakeholders when determining their taxable income within two years of the sale of the Business.

Detailed Reasoning

60. As it has been determined that the capital gain made by Head Company will be disregarded under the 15 year exemption, it is considered to be an exempt amount under section

61. 152-125. Any distributions made by Head Company of that exempt amount to a CGT concession stakeholder is:[36]

· not included in the assessable income of the CGT concession stakeholder[37]

· not considered a dividend or frankable distribution,[38] and

· not deductible to the company or trust[39]

if certain conditions are satisfied.

62. The conditions are:

· the company or trust must make a payment (whether directly or indirectly through one or more interposed entities) within two years after the CGT event that resulted in the capital gain[40] or, in appropriate circumstances, such further time as allowed by the Commissioner[41]

· the payment must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event,[42] and

· 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.[43]

63. Section 152-60 defines a CGT concession stakeholder as a significant individual in the company or a spouse of the individual who has a small business participation percentage greater than zero in their own right. Each of Head Company's five shareholders is entitled to an equal share of the proceeds from the sale of the Business. An individual is a significant individual if the individual has a small business participation percentage (direct and indirect interests) in the trust of at least 20%.[44] Each of the five shareholders has a small business participation percentage of 20% in Head Company. Therefore each shareholder is a CGT concession stakeholder of Head Company.

64. Head Company will pay its exempt amount (and the exempt amount that forms the dividend from Sub Co 1) to its shareholders. Paragraph 152-125(1)(b) permits payments of the exempt amount made within two years of the sale of the Business by Head Company to a CGT concession stakeholder to maintain its exempt status. As a CGT concession stakeholder, each shareholder of Head Company is entitled to receive 20% of the exempt amount when the calculation in section 152-125(2) is applied to the amount.

65. Sub Co 1 and Head Company are able to disregard the total amount of payments that form the exempt amount, made to the shareholders who are CGT concession stakeholders when determining their taxable income. However, any other income derived by Head Company that is not the exempt amount under section 152-125, will not be exempt income and will remain assessable income to Head Company.

[1] Subsection 152-10(1AA)

[2] Subsection 328-110(1)

[3] Subsection 328-115(1)

[4] Subsection 328-115(2)

[5] Subsection 328-115(3)

[6] Subsection 328-130(1)

[7] Subsection 328-115(3)

[8] Subsection 152-40(1)

[9] Subsection 152-35(1)

[10] Subsection 152-10(1AA)

[11] Subsection 328-110(1)

[12] Paragraphs 58, 81 and 82 in Taxation Ruling TR 2019/1

[13] Subsection 328-115(1)

[14] Subsection 328-115(2)

[15] Subsection 328-115(3)

[16] Subsection 328-130(1)

[17] Subsection 328-115(3)

[18] Subsection 152-40(1)

[19] Subsection 152-35(1)

[20] Section 152-100

[21] Subsection 152-110(2)

[22] Subsection 152-110(3)

[23] Section 40-295

[24] Schedule 1 - Allocation of Purchase Price

[25] Paragraphs 1.54 and 1.55 and Example 1.17 in the Explanatory Memorandum to Tax Laws Amendment (2006 Measures No 7) Bill 2006

[26] Section 152-55

[27] Paragraph 152-125(1)(c)

[28] Subsection 6-15(3)

[29] Subsection 152-125(3)

[30] Paragraph 8-1(2)(c)

[31] Paragraph 152-125(1)(b)

[32] Subsection 152-125(4)

[33] Paragraph 152-125(1)(c)

[34] Subsection 152-125(2)

[35] Sections 152-55, 152-65, 152-70 and 152-75

[36] Paragraph 152-125(1)(c)

[37] Subsection 6-15(3)

[38] Subsection 152-125(3)

[39] Paragraph 8-1(2)(c)

[40] Paragraph 152-125(1)(b)

[41] Subsection 152-125(4)

[42] Paragraph 152-125(1)(c)

[43] Subsection 152-125(2)

[44] Sections 152-55, 152-65, 152-70 and 152-75

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