1052018246969 | Legal database

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Edited version of private advice

Authorisation Number: 1052018246969

Date of advice: 5 August 2022

Ruling

Subject: Non-assessable non-exempt income

Question 1

Will the payments from the Company to the shareholder be treated as non-assessable non-exempt income pursuant to subsection 152-125(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods

Year ending 30 June YYYY

The scheme commences on

1 July YYYY

Relevant facts and circumstances

1. The Company was incorporated on DD MM YYYY.

2. The current Company shareholders are:

(a) Shareholder 1 who directly owns X% of shares, and

(b) Shareholder 2 who directly owns some shares and indirectly owns the remainder through a Trust.

3. The Trust was created by a will and Shareholder 2 is entitled to X% of the income of the Trust.

4. Shareholder 1 and the Trust both hold more than X% of the ordinary shares in the Company. Thus, they are both 'connected entities' with the Company.

5. The Company does not have any affiliates.

6. There are no other entities that are controlled by either shareholders or the Trust.

7. Neither shareholders nor the Trust carry on a business.

8. The Company owns two properties. Given the shareholders ages, and their desire to retire, it is intended for the Company to:

(a) sell Property 1 within the next X months

(b) sell Property 2 within the next X months, and

9. The Company previously obtained two private rulings:

(a) the first ruling concluded Property 1 is a p.re-CGT asset, and

(b) the second ruling concluded:

i. Property 1 satisfied the active asset test

ii. Shareholders 1 and 2, are significant individuals of the Company, as they both have, directly or indirectly, a X% small business participation percentage in the company, and

iii. both Shareholders 1 and 2, are CGT concession stakeholders of the Company.

10. The shareholdings in the Company have not changed since the ruling issued therefore both Shareholders 1 and are still classified as significant individuals and CGT Concession Stakeholders of the Company.

11. The Company will make the payments of the sale proceeds to its shareholders in accordance with their shareholdings within two years from the CGT event for the sale of Property 1.

Information provided

You have provided information in a number of documents in relation to the ruling request including your private ruling application received DD MM YYYY.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 152-125

Income Tax Assessment Act 1997, subsection 152-125(1)

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)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Will the payments from the Company to Shareholder 1 be treated as non-assessable non-exempt income pursuant to subsection 152-125(3)?

Summary

The payments from the Company to Shareholder 1 will be treated as non-assessable non-exempt income by operation of subsection 152-125(3).

Detailed reasoning

Distributions of the exempt amount

1. Subsection 152-125(1) provides that, if a capital gain made by a company is disregarded under the small business 15-year exemption, any distribution made by the company of that exempt amount to a CGT concession stakeholder is not included in the assessable income of the CGT concession stakeholder, and not deductible to the company, if the following conditions are satisfied:

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

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

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

2. In determining the taxable income of the company, the trust, individual or any of the interposed entities, disregard the total amount of the payment made to the CGT concession stakeholder up to the following limit:[1]

Stakeholder's participation percentage X Exempt amount

3. Subsection 152-125(3) states that if a company makes such a payment, this Act applies to the payment, to the extent that it is less than or equal to the limit mentioned in subsection (2), as if:

(a) it were not a dividend; and

(b) it were not a frankable distribution.

Application to your circumstances

4. It has previously been determined that the capital gain made by the Company will be disregarded under the small business 15-year exemption and the amount of the capital gain is taken to be an exempt amount under section 152-125.

5. Your small business participation percentage in the Company is X%. Therefore, you are a CGT concession stakeholder of the Company.

6. The Company has advised that it will make the payment to you within X years after Property 1 has been sold.

7. The Company has advised that it will pay you X% of the exempt amount as a dividend.

8. Paragraph 152-125(3)(a) specifically includes a dividend in the exempt amount if the amount paid does not exceed the amount calculated under subsection 152-25(2) to determine the CGT stakeholders exempt amount.

9. As a CGT concession stakeholder, you are entitled to receive X% of the exempt amount when the calculation in subsection 152-125(2) is applied to the amount.

10. The Company have advised it will pay you X% of the exempt amount and will not exceed the CGT stakeholders exempt amount.

11. The payment to you will be treated as non-assessable non-exempt income pursuant to subsection 152-125(3).

12. The 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 its taxable income.

[1] Subsection 152-125(2)

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