Edited version of private ruling

Authorisation Number: 1011600122799

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Ruling

Subject: Capital gains tax (CGT) - small business concessions

Do you satisfy the basic conditions for the small business CGT concessions under section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following periods:

1 July 2009 - 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You and your spouse formed a company. The company carried on a business. You were each issued one share. You were secretary and your spouse the sole director of the company.

You acquired a property as tenants in common with another entity. The property was leased to the company.

Some time later you resigned as secretary of the company and you disposed of your share. Your spouse remained a 50% shareholder in the company.

You continued to work in a management role for the company and was actively involved in the decision making process until your marriage breakdown.

Around this time you and your spouse entered into a binding financial agreement which amongst other things required the splitting of proceeds of certain assets including the property.

You later divorced. A contract for the sale of the property was entered into soon after.

The combined assets of the parties satisfy the maximum net asset value test.

The company is a small business entity.

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.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 328-C

Income Tax Assessment Act 1997 Section 152-47

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Section 328-130

Reasons for decision

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'. The basic conditions are contained in Subdivision 152-A of the ITAA 1997. The basic conditions to be satisfied are:

a. a CGT event happens in relation to a CGT asset of yours in an income year, and

b. the event would have resulted in the gain (apart from Division 152 of the ITAA 1997), and

c. at least one of the following applies:

1. you are a small business entity, or

2. you satisfy the maximum net asset value test, or

3. you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership, and

d. the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Basic condition (a)

This condition requires a CGT event to happen in relation to your CGT asset. A CGT asset includes any kind of property or legal or equitable right. The relevant CGT event would be the disposal of the asset which would trigger a CGT event A1.

You entered into a contract for the disposal of the property. Therefore, a CGT event has happened in relation to your CGT asset and this condition is satisfied.

Basic condition (b)

A capital gain arose as a result of the CGT event. Therefore, this condition is satisfied.

Basic condition (c)

The maximum net asset value test is set out in section 152-15 of the ITAA 1997. You state that the combined value of the parties assets satisfy the maximum net asset value test. Therefore as you satisfy one of the requirements this condition is satisfied.

Basic condition (d)

This condition requires the active asset test in section 152-35 of the ITAA 1997 to be satisfied in relation to the asset. You satisfy the active asset test if you have owned the asset for 15 years or less and the asset was an active asset for a total of at least half of the period of ownership.

An asset is an active asset at a time if it is used in the course of carrying on a business by you, an affiliate of yours or an entity that is connected with you. Subdivision 328-C of the ITAA 1997 sets out the meanings of connected entity and affiliate.

An entity is connected to another entity if either entity or its affiliate controls the other entity. An entity controls a company if the entity beneficially owns equity interests in the company that carry at least 40% of the voting power in the company (section 328-125 of the ITAA 1997).

An affiliate is an individual or company that, in relation to their business affairs, acts or could reasonably be expected to act in accordance with your directions or wishes, or in concert with you (section 328-130 of the ITAA 1997). In addition to this, a spouse can be treated as an affiliate of an individual (section 152-47 of the ITAA 1997). Under this section your spouse can be taken to be your affiliate where an asset is owned by you and that asset is used in a business carried on by an entity that your spouse has a controlling interest in.

To satisfy the active asset test the asset must have been an active asset for a period of at least half the ownership period.

As a result of your shareholding you had a controlling interest in the company and it was a connected entity. A CGT asset leased by a taxpayer to a connected entity for use in the connected entity's business is an active asset of the taxpayer (Taxation Determination TD 2006/63). The building was an active asset during the period you held a controlling interest.

You later disposed of your controlling interest in the company. The asset continued to be used by the company which your spouse held a controlling interest in. Under section 152-47 of the ITAA 1997, your spouse is considered to be your affiliate during this period. As your affiliate has a controlling interest in the entity using the asset, the entity is considered to be connected to you for the purpose of 328-125 of the ITAA 1997. The asset was used by a connected entity and as a result it was an active asset during this period.

As the property was an active asset for more than half the period of ownership it satisfies the active asset test. As a result this condition is satisfied.

Note - as the company is a connected entity and your spouse is your affiliate, the assets of both entities are drawn into your maximum net asset value test (section 152-15 of the ITAA 1997). In any case you state the combined asset values satisfy the maximum net asset value test.

In conclusion, you satisfy all of the basic conditions for relief under Division 152 of the ITAA 1997.

Applying the small business CGT concessions

To apply the small business 50% active asset reduction, you only need to satisfy the basic conditions. There are no further requirements.

The small business retirement exemption allows an individual to choose to disregard all, or part of, a capital gain provided that the CGT retirement exemption limit for the individual for who the choice is made is not exceeded. The CGT retirement exemption limit is $500,000 per individual.

You can choose to disregard all or part of a capital gain under the small business retirement exemption if:

· you satisfy the basic conditions, and

· you keep a written record of the amount you choose to disregard (the CGT exempt amount), and

· if you were under 55 years of age just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA).

For further information on these concessions you can refer to the publication Advanced guide to capital gains tax concessions for small business 2008-09 (NAT 3359) on the Tax Office's web site.