Edited version of private ruling

Authorisation Number: 1011532063432

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Ruling

Subject: CGT - small business concessions - additional basic conditions for shares

Question 1

Just prior to the disposal of shares held in the Company did you meet one of the additional basic conditions contained in subsection 152-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2009

Relevant facts and circumstances

You advise that both of you meet all the basic conditions contained within subsection 152-10(1) of the ITAA 1997.

Rulee 1 was involved in the establishment of the Company and initially had a 33.3% share holding, the other 66.6% being held by your business partner. However, soon after Rulee 1 disposed of half of their share holding to Rulee 2 and for a considerable period including the time just prior to disposal you both held 16.6% of the shares.

Your business partner, holding 66.6% of the shares, was the only capital gains tax (CGT) concession stakeholder in the Company.

Being natural persons neither of you are entities to which the table in subsection 152-70(1) can apply.

There are no intermediate entities involved in this arrangement.

Relevant legislative provisions

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

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

Income Tax Assessment Act 1997, paragraph 152-10(2)(a)

Income Tax Assessment Act 1997, paragraph 152-10(2)(b)

Income Tax Assessment Act 1997, section 152-55

Income Tax Assessment Act 1997, section 152-60

Income Tax Assessment Act 1997, section 152-70

Income Tax Assessment Act 1997, subsection 152-70(1)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

Note that all subsequent legislative references are to the ITAA 1997 unless otherwise stated.

When the asset in question is shares in a company, subsection 152-10(2) states, in part, as follows:

If the CGT asset is a share in a company (the object company) …one of these additional basic conditions must be satisfied just before the CGT event:

(a) you are a CGT concession stakeholder in the object company…, or

(b) CGT concession stakeholders in the object company…together have a small business participation percentage in you of at least 90%.

The meaning of CGT concession stakeholder is outlined in section 152-60 which states:

An individual is a CGT concession stakeholder of a company…at a time if the individual is:

(a) a significant individual in the company…, or

(b) a spouse of a significant individual in the company…, if the spouse has a zero small business participation percentage in the company…at that time that is greater than zero.

The meaning of significant individual is stated at section 152-55 which provides that:

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%.

Where there is no intermediate entity, an entity's small business participation percentage in another entity is calculated with reference to the direct small business participation percentage provisions under section 152-70. For a company, the table at subsection 152-70(1) provides that the small business participation percentage may be the percentage of:

- voting power that the entity is entitled to exercise

- any dividend payment that the entity is entitled to receive, and

- any capital distribution that the entity is entitled to receive.

If these percentages vary then the relevant percentage to be used is the smallest one.

Application to your circumstance

Subsection 152-10(1):

We note that in your application you state that each of the requirements under subsection 152-10(1) were met in relation to the disposal of your share holdings. Accordingly, we have not considered those tests in this ruling.

Paragraph 152-10(2)(a):

Just prior to disposal, you both had small business participation percentages of 16.6% which is less than the 20% required to be considered significant individuals and therefore CGT concession stakeholders. Accordingly, neither of you satisfy the requirement of paragraph 152-10(2)(a).

Paragraph 152-10(2)(b):

For the purpose of this provision, the only CGT concession stakeholder in the Company was your business partner who held 66.6% of the shares at the time of disposal. There are no other intermediaries between you and the Company.

As you are both natural persons in which other entities cannot hold a small business participation percentage then for the purpose of this test it is impossible for your business partner to hold a 90% interest in either of you. Accordingly, neither of you satisfy the requirement of paragraph 152-10(2)(b).

As neither of you meet either of the two additional basic conditions under subsection 152-10(2), you are not entitled to access the CGT concessions for small business.