Edited version of private advice

Authorisation Number: 1052302071096

Date of advice: 04 October 2024

Ruling

Subject: Capital gains tax

Question 1

Are you eligible for the 50% discount under section 115-100 of the Income Tax Assessment Act 1997 (ITAA 1997) with regards to a payment you receive in relation to a company's Active Asset Reduction Reserve when it is distributed to you upon the company's liquidation?

Answer 1

Yes.

Question 2

Are you eligible for the capital gains tax (CGT) small business 50% active asset reduction under section 152-205 of the ITAA 1997 with regards to a payment you receive in relation to a company's Active Asset Reduction Reserve when it is distributed to you upon the company's liquidation?

Answer 2

Yes.

Question 3

Are you eligible for the capital gains tax (CGT) small business retirement exemption under section 152-305 of the ITAA 1997 with regards to a payment you receive in relation to a company's Active Asset Reduction Reserve when it is distributed to you upon the company's liquidation?

Answer 3

Yes.

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commenced on:

1 July 19XX

Relevant facts and circumstances

You hold 50% of the shares in a private company (Company) which was incorporated in the 1990's.

The Company acquired (Property) around that time.

You ran a partnership business from the Property for more than X years

You sold the business and retired after its sale.

The Property was then leased to the purchasers of the business.

The Company disposed of the Property in the year ended XX June 20XX.

In its tax return for the year ended 30 June 20XX the Company included a capital gain.

The Company applied the small business 50% active asset reduction to reduce the capital gain.

The Company then applied the small business retirement exemption to the remaining gain.

As a result, you have used some of your lifetime CGT retirement exemption limit of $XXXX.

The reduced amount from the Company applying the CGT small business 50% active asset reduction to the gain made on the sale of the Property is accounted for in the Company's accounts as the 'Active Asset Reduction Reserve'.

Your 50% share of the Active Asset Reduction Reserve of will be paid to you upon liquidation and cancellation of your shares in the Company.

You are over XX years of age.

The Company has an aggregated turnover of less than $XXXX.

You, the Company and all your affiliates and connected entities had a combined net asset value of less than $XXXX with the property and family home being the only assets owned by you at the time.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 115-25

Income Tax Assessment Act 1997 section 115-100

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

Income Tax Assessment Act 1997 section 152-205

Income Tax Assessment Act 1997 section 152-305

Reasons for decision

Although your business ceased some time ago ago, the property is an active asset test as it was used in a business for over X years by you, your affiliates or your connected entities. Both you and the Company meet the maximum net asset value (MNAV) test as the Property and your family home were the only assets held. Hence you all meet the basic conditions in subsection 152-10(1) of the ITAA 1997 to be eligible to access the small business CGT concessions.

Since the assets you will be disposing of upon liquidation of the Company are your shares in the company, there are additional conditions you must meet.

One of these is that just before the CGT event, either you were a CGT concession stakeholder in the company or the CGT concession stakeholders in the company had a total small business participation percentage of at least 90% (the 90% test and applicable when there are interposed entities involved so not the case here). You are a CGT concession stakeholder as you hold 50% of the shares in the company.

Another additional condition is the modified connected entity rule which is inapplicable since the Company does not control any entities.

The final additional condition is the modified active asset test. As the only asset of the Company was the Property which has already been ruled as active, this test is also met.

You are therefore eligible to access the small business CGT concessions.

The company has an active asset reduction reserve in relation to applying thesmall business CGT 50% Active Asset Reduction concession in relation to the sale of the Property. When the Company is liquidated and it's shares cancelled the amounts you receive in relation to this reserve are not dividends and will retain their capital nature, are referable to the company's active asset reduction reserve, and be subject to the CGT provisions found in Parts 3.1 and 3.3 of the ITAA 1997.

Capital gain discount

The liquidation of a company ordinarily results in the happening of CGT event C2 in respect of the shares and the amounts distributed by a liquidator will form capital proceeds in relation to that event.

The capital gain arising from CGT event C2 is a discount capital gain and would be eligible for the 50% discount pursuant to section 115-25 of the ITAA 1997 when the capital gain resulted from a CGT event happening to a CGT asset that was acquired at least 12 months before the CGT event.

The shares were held for more than 12 months.

Accordingly, any capital gain arising from CGT event C2 is a discount capital gain and eligible for the general 50% discount.

Small business active asset reduction

Under section 152-205 of the ITAA 1997, the 50% active asset reduction automatically applies if the basic conditions in Subdivision 152-A of the ITAA 1997 are met. There are no further requirements.

As explained above, you meet all of the basic conditions, including the additional conditions, in Subdivision 152-A of the ITAA 1997 and so are eligible for the Small Business 50% active asset reduction in section 152-205 of the ITAA 1997 in relation to any capital gain arising from CGT event C2 that occurs once shares are cancelled and upon receipt of the liquidator's distributions.

Small business retirement exemption

Section 152-305 of the ITAA 1997 allows you as an individual to choose to disregard all or part of a capital gain if you satisfy the basic eligibility conditions under Subdivision 152-A of the ITAA 1997 as discussed above, and some additional conditions if you are under XX years of age.

As you meet the basic conditions to apply the small business CGT concessions and you are over XX, you are eligible to claim the small business CGT retirement exemption. You can choose to disregard the capital gain up to your lifetime limit of $XXXX. You must keep a written record of the amount you choose to disregard (the CGT exempt amount).

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