Edited version of private advice

Authorisation Number: 1051748456652

Date of advice: 2 September 2020

Ruling

Subject: Small business capital gains tax concessions

Question

Does Trust X satisfy the basic conditions for small business capital gains tax relief in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the sale of the shares in Company Y?

Answer

Yes.

Based on the facts provided, all the basic conditions have been met as:

·         Trust X satisfies the maximum net asset value test because the total net value of the CGT assets owned by Trust X and its connected entities did not exceed $X million just before the CGT event (Trust X had no affiliates);

·         The active asset test is met in relation to Trust X's shares in Company Y because during at least half the period of ownership, the market value of Company Y's active assets represented 80% or more of the market value of all of Company Y's assets;

·         The modified active asset test is also met in relation to Trust X's shares in Company Y because none of the modifications are applicable (Company Y did not acquire financial instruments or cash for the purpose of meeting the test and Company Y did not own any interests in a company or trust so had no 'later entities');

·         Company Y meets the modified maximum net asset value test that applies to the object entity.

Only Company Y's CGT assets are included in the test as Company Y had no affiliates or an ownership interest in any other entity. Company Y's net asset value just before the CGT event did not exceed $X million; and

·         Just before the CGT event, CGT concession stakeholders in Company Y had a small business participation percentage in Trust X of at least 90%.

A beneficiary's direct small business percentage in a discretionary trust at any time during an income year is the percentage of the trust's distributions for that income year that the beneficiary is entitled to (subsection 152-70(1) of the ITAA 1997). Individual Z was entitled to 90% of all of Trust X's distributions for the income year of the CGT event. Therefore, Individual Z had a small business participation percentage in Trust X of 90% just before the CGT event. As Trust X owned a third of Company Y, Individual Z had a small business participation percentage in Company Y of at least 20% (90% x 1/3) and consequently was a CGT concession stakeholder in Company Y just before the CGT event.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

Trust X is a discretionary trust established in Australia that acquired a third of the issued shares in Company Y in the 20XX-XX income year.

Other Shareholders, who are not affiliates of, or connected with, Trust X, held the balance of the shares in Company Y.

Individual Z was the sole director of Company Y prior to its sale.

By contract dated and settled XX/XX/XXXX, all the shares in Company Y were sold by Trust X and the Other Shareholders to an independent third party for consideration of less than $X million.

Individual Z is the sole shareholder and sole director of the corporate trustee of Trust X.

Individual Z and certain other entities are connected with Trust X.

No companies or individuals are affiliates of Trust X.

Individual Z received 90% of all of Trust X's distributions for the 20XX-XX income year.

Just before the CGT event, the total of the net value of the CGT assets of Trust X, Individual Z and the other entities connected with Trust X was less than $X million.

For at least half the period of Trust X's ownership of its shares in Company Y, the market value of Company Y's active assets represented 80% or more of the market value of all of Company Y's assets.

There are no affiliates of, or entities connected with, Company Y.

Company Y has not owned an interest in any company or trust.

Company Y's net asset value just before the CGT event for the purposes of paragraph 152-10(2)(c) of the ITAA 1997 did not exceed $X million.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subsection 152-10(2)

Income Tax Assessment Act 1997 subsection 152-10(2A)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-40(3)

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