Edited version of private ruling

Authorisation Number: 1011613877703

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Ruling

Subject: Small business capital gains tax (CGT) concessions

Do you qualify for the small business capital gains concessions under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) on the compulsory disposal of shares?

No.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

The partnership carries on a business.

You were required to acquire shares in a company.

These shares must now be disposed of.

You have advised that you individually did not receive 20% of the dividends or any capital distributions from your shareholding.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10.

Income Tax Assessment Act 1997 Paragraph 152-10(2)(a).

Income Tax Assessment Act 1997 Section 152-40.

Income Tax Assessment Act 1997 Subsection 152-40(1).

Income Tax Assessment Act 1997 Paragraph 152-40(3)(a).

Income Tax Assessment Act 1997 Paragraph 152-40(3)(b).

Income Tax Assessment Act 1997 Section 152-60.

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

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

(Please note that all legislative references are to ITAA 1997). 

Section 152-10 sets out the basic conditions for relief for small business.

Basic Conditions

The basic conditions are:

a)      a CGT event happens in relation to a CGT asset of yours in an income year. This condition does not apply in the case of CGT event D1

b)      the event would (apart from Division 152 of the ITAA 1997) have resulted in a capital gain

c)      you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997, and

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

If the CGT asset is a share in a company or trust, additional conditions must be satisfied:

· In the case where the taxpayer is an individual who owns shares or trust interests in a company or trust (the object company or trust), the taxpayer must be a CGT concession stakeholder in the object company or trust: s 152-10(2) (a).

· Note that a CGT concession stakeholder can only be an individual.

In this case, as you are an individual who owns shares in the company, you must be a CGT concession stakeholder as defined by section 152-60. This section states that a CGT concession stakeholder is:

a)      a significant individual in the company; or

b)      a spouse of a significant individual

An individual is a significant individual in a company or trust if the individual has a small business participation percentage in the company or trust of at least 20%

The 20% can be made up of direct and indirect percentages.

An entity's direct small business participation percentage in a company is 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. 

In this case businesses up the shareholding in the company. Each business had only one vote and each would not have received 20% of the dividends or any capital distributions.

You have confirmed that you individually did not receive 20% of the dividends or any capital distributions. Therefore, you do not qualify as a Significant Individual.

Further, an intangible asset that is inherently connected with a business carried on by a small business entity can be an active asset, however shares are not intangible assets therefore, the shares held by you in this case are not active assets for the purposes of section 152-40. A 50 % CGT discount may be available under Division 115.