Edited version of private advice

Authorisation Number: 1051701005748

Date of advice: 03 July 2020

Ruling

Subject: Capital gains tax - small business concessions

Question 1

Are the shares in a public company an active asset?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased shares in a public company, on two separate occasions.

The shares entitled you an exclusive right to occupy an office room. You entered into a lease agreement with the public company. The ownership of these shares was limited to persons of a certain profession.

The company is an unlisted public company with AORD shares. You were not a significant individual of the company.

The number of shares owned determines the size of the room the shareholder is entitled to occupy or alternatively sublease to persons in a certain profession.

Under the terms of the lease agreement you were liable for any holding and outgoing costs associated with the premises.

When you acquired the first parcel of shares this room was occupied by your spouse, which they conducted their business within this entitled area.

You received rental income from your spouse at market rates for their use of this room.

You purchased the second parcel of shares and this entitled you to occupy a larger area at the same premise.

Your spouse moved into the larger area and they continued to conduct their business in the new area. Your spouse continued to pay you rental income at current market rates, for the use of this room in carrying on their business.

You and your spouse separated and subsequently divorced.

Following the separation and divorce you continued to receive rental income at market rates from your ex-spouse for the use of them carrying out their business in this room until the shares were sold.

You sold the shares in 20XX and you incurred a capital gain.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 100-20

Income Tax Assessment Act 1997 section 100-25

Income Tax Assessment Act 1997 section 102-25

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-60

Reasons for decision

The meaning of the term 'CGT (capital gains tax) asset' is defined in section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Some well-known CGT assets are listed in section 100-25(2) of ITAA 1997 and this includes shares. Other not so well-known CGT assets listed in section 100-25(3) of ITAA 1997, includes contractual rights.

Sections 100-20(1) and (2) of the ITAA 1997 describes what CGT events attract CGT, namely CGT event A1. If more than one CGT event can happen, the one you use is the one that is the most specific to your situation (section 102-25 of the ITAA 1997).

CGT event A1 happens when the disposal contract is entered into (section 104-10 of the ITAA 1997).

The disposal of a CGT asset that is used in the course of carrying on your business, and either a capital gain or capital loss arises, may allow an entity to access the CGT concessions for small business relief that is defined in Division 152 of the ITAA 1997.

CGT Concessions - basic conditions

Subsection 152-10(1) of ITAA 1997 provides the conditions that must be satisfied for a capital gain to be reduced or disregarded:

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

(b)  the event would (apart from this Division) have resulted in the gain;

(c)   at least one of the following applies:

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

(ii)   you satisfy the maximum net asset value test

(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 satisfied the active asset test.

Additional basic conditions - shares in a company

Subsection 152-10(2) of the ITAA 1997 includes an additional basic condition that must be satisfied for a capital gain made on shares in a company to be eligible for relief pursuant to Division 152 of ITAA 1997. Subsection 152-10(2)(d) states that just before the CGT event you are a CGT concession stakeholder in the object company or CGT concession stakeholders in the object company together have a small business participation percentage in you of at least 90%.

Significant individual

Subsection 152-55 of ITAA 1997 describes an individual as being a significant individual in a company if they have a small business participation percentage in the company of at least 20% - this 20% can be made up of direct and indirect percentages.

That percentage is determined by the smaller or smallest percentage of voting power, dividend or distribution of share capital the individual is entitled to.

All classes of shares (other than redeemable shares) are taken into account in determining an entity's participation percentage in a company.

CGT concession stakeholder

Subsection 152-60 of ITAA 1997 states that an individual is a CGT concession stakeholder of a company if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company at that time that is greater than zero.

This participation percentage can be held directly or indirectly through one or more interposed entities.

Active asset

Subsection 152-35(1) of the ITAA 1997 describes the conditions a CGT asset needs to satisfy 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 test period detailed below, 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 test period.

Under subsection 152-40(1) of the ITAA 1997 states a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by you or your small business CGT affiliate or another entity that is connected with you under paragraph 152-40(1)(c) of the ITAA 1997. An active asset may be a tangible asset or an intangible asset.

The following assets cannot be active assets (subsection 152-40(4) of the ITAA 1997):

a)    interests in a connected entity (other than those satisfying the 80% test)

b)    shares in companies and interests in trusts (other than those satisfying the 80% test)

c)     shares in widely held companies unless they are held by a CGT concession stakeholder of the company

d)    shares in trusts that are similar to widely held companies unless they are held by a CGT concession stakeholder of the trust or other exceptions for trusts with 20 members or less apply

e)    financial instruments, including loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, rights and options

f)      an asset whose main use in the course of carrying on the business is to derive interest, an annuity, rent, royalties or foreign exchange gains. However, such an asset can still be an active asset if it is an intangible asset that has been substantially developed, altered or improved by the taxpayer so that its market value has been substantially enhanced or its main use for deriving rent was only temporary.

Application to your situation

You were the owner of the shares in an unlisted public company, and those shares are a CGT asset.

You sold those shares in 20XX at which time CGT event A1 occurred.

The eligibility for the CGT concessions is determined based on the CGT asset that was disposed of and in your case, that CGT asset is shares in a company.

For the sale of the shares to qualify for the small business concessions you need to satisfy the basic conditions and the additional basic conditions where the CGT asset was shares in a company.

You told us that you were not a significant individual of the company, therefore you were not a CGT concession stakeholder and therefore you did not satisfy the additional basic conditions.

The CGT asset was not an active asset, as the entity was a widely held company and you were not a CGT concession stakeholder.

The Commissioner acknowledges the shares provided you a right to occupy a room in a building; however, this does change the character of the asset i.e. shares in the company.

Therefore, in your case, the asset you disposed of was shares and you did not satisfy the basic or additional tests in order for the asset to be considered an active asset.

As you are not considered to be a CGT concession stakeholder in the company then you are not eligible to apply the small business concessions on the sale of your shares.

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