Edited version of private ruling

Authorisation Number: 1011655889529

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Ruling

Subject: Small business CGT concessions

Question 1

Did you satisfy the maximum net asset value test in section 152-15 of the Income Tax Assessment Act 1997 (ITAA 1997) just before the time of capital gains tax (CGT) event K8?

Answer

The Commissioner declines to rule on this question.

Question 2

If you satisfy the maximum net asset value test, will section 152-205 of the ITAA 1997 apply to reduce by 50 percent the amount of your CGT event K8 capital gain remaining after applying step 3 of the method statement in subsection 102-5(1) of the ITAA 1997?

Answer

Yes.

Question 3

Will the Commissioner extend the time in which you can choose to apply the small business roll-over in Subdivision 152-E of the ITAA 1997?

Answer

The Commissioner declines to rule on this question.

Question 4

If the answer to question 3 is yes, did CGT event J5 under section 104-197 of the ITAA 1997 happen in the 2009 income year?

Answer

As the Commissioner has not exercised the discretion to which question 3 relates, it is not necessary to answer this question.

Question 5

If the answers to questions 3 and 4 are yes, are you eligible to apply the small business retirement exemption in Subdivision 152-D of the ITAA 1997 to disregard the capital gain arising as a result of CGT event J5 happening, up to your CGT retirement exemption limit?

Answer

As the Commissioner has not exercised the discretion to which question 3 relates, it is not necessary to answer this question.

This ruling applies for the following periods:

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2006

Relevant facts and circumstances

You were both over 55 years of age at the time of CGT event K8 happening

Your company was incorporated less than 15 years ago and is a trading company which operates a business. On incorporation, you each held one ordinary share in the company. You were the only shareholders in the company until the time of CGT event K8 happening.

The company is an Australian resident for tax purposes.

In relation to the trust:

(a) you are both beneficiaries of this trust

(b) you are both guardians and appointors of this trust and

(c) you are both directors of the trustee company.

In an email to your then accountant, you (via an employee) requested that the accountant arrange for additional shares in the company to be issued to the trust. The email requested that the accountant contact you if there were any problems with this.

By requesting the then accountant to contact you if there were any problems with the issue of shares to the trust, you expected that the accountant would advise you of any significant tax liabilities arising from the proposed issue of shares to the trust.

The accountant did not respond to you (directly or indirectly). However, the accountant prepared and sent you the relevant forms required to issue the shares in the company to the trust.

You signed the forms and the shares were issued to the trust for nominal consideration. This resulted in CGT event K8 happening to both of you.

Your income tax returns for the 2007 income year were prepared by your then accountant, who did not advise you that CGT event K8 had happened to each of you during this income year. Accordingly, your income tax returns state that no CGT event happened to you during this income year, and you intend to amend your income tax returns for this income year.

You have attached the relevant balance sheets for the 2006 and 2007 income years for the company, the trust and your partnership.

These balance sheets indicate that you satisfied the maximum net asset value test at the time of CGT event K8 happening. You have also provided a calculation of the goodwill of the company.

For at least half of the period from the incorporation of the company to the time that CGT event K8 happened to you, the total of:

(a) the market values of the active assets of the company and

(b) the market value of any financial instruments of the company that are inherently connected with the business of the company and

(c) any cash of the company that was inherently connected with the business of the company

was 80 percent or more of the market value of all of the assets of the company.

You did not acquire a replacement asset by the end of the replacement asset period.

You state that you each had a direct small business participation percentage of 50 percent in the company.

You have forwarded a copy of an email requesting the issue of additional shares in the company to the trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 102-5(1)

Income Tax Assessment Act 1997 Subsection 103-25(1)

Income Tax Assessment Act 1997 Section 104-197

Income Tax Assessment Act 1997 Section 104-250

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

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 Section 152-205

Income Tax Assessment Act 1997 Subsection 725-145(2)

Income Tax Assessment Act 1997 Section 725-245

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, 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

The maximum net asset value test in section 152-15 of the ITAA 1997 which applied just before the relevant CGT event required that the total net value of CGT assets owned by you, entities connected with you, and any small business CGT affiliates of yours or entities connected with those affiliates did not exceed $6 million just before the CGT event that results in the capital gain for which the concessions are sought.

A private ruling is a written statement of the Commissioner's opinion of how a relevant provision applies, or would apply, to a particular entity in relation to a specified scheme. The information supplied by you with your application indicates that the total net value of your CGT assets for the purposes of the maximum net asset value test was less than $6 million just before the CGT event.

We consider that this question is requesting a confirmation of a valuation, and is not requesting the Commissioner's opinion of how a relevant provision applies. The Commissioner declines to make a ruling on this issue.

If you are unsure of the correctness of your method of valuing the goodwill of the company, you can ask the Commissioner for a valuation of the goodwill. The Commissioner may refer the valuation request to a valuer, and you may be charged for this in accordance with the income tax regulations. Paragraphs 16 to 18 of Taxation Ruling TR 2006/11 provide further information in this regard.

Paragraphs 47 and 48, and paragraphs 114 to 119 of Taxation Ruling TR 1999/16 discuss the valuation of goodwill and may be of assistance.

Question 2

To apply the small business 50 percent reduction in section 152-205 of the ITAA 1997, you only need to satisfy the basic conditions in section 152-10 of the ITAA 1997. There are no other requirements.

The basic conditions to be satisfied 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 the 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.

As the CGT assets in your case are shares in a company, one of these additional basic conditions in subsection 152-10(2) of the ITAA 1997 must also 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 the company of at least 90 percent.

Basic condition (a)

The relevant CGT assets in this case are your 'down interests' under section 725-245 of the ITAA 1997, being the one ordinary share in the company owned by each of you.

The circumstances of your case indicates that there was a 'direct value shift' when the additional shares in the company were issued to the trust. Your circumstances are similar to the example provided as part of subsection 725-145(2) of the ITAA 1997 relating to direct value shifts.

CGT event K8 under section 104-250 of the ITAA 1997, relating to direct value shifts, happened to your down interests in the 2007 income year and this condition is satisfied.

Basic condition (b)

Any capital gain will result from the above CGT event, and this condition will be satisfied.

Basic condition (c)

You will need to satisfy the maximum net asset value test just before the happening of the CGT event.

Basic condition (d)

This condition requires that the active asset test in section 152-35 of the ITAA 1997 is satisfied. This test is satisfied if:

(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period detailed below or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the period detailed below:

The period:

(a) begins when you acquired the asset and

(b) ends at the earlier of:

i) the CGT event and

ii) if the relevant business ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows) when the business ceased.

Active asset

Section 152-40 of the ITAA 1997 provides the meaning of active asset.

A share in a company will be an active asset under subsection 152-40(3) of the ITAA 1997 at a given time if:

(a) the company is an Australian resident at that time, for the income year in which that time occurs and

(b) the total of:

i) the market values of the active assets of the company and

ii) the market value of any financial instrument of the company that are inherently connected with a business that the company carries on and

iii) any cash of the company that is inherently connected with such a business

is 80% or more of the market value of all of the assets of the company.

You have stated that the company was an Australian resident and that the above requirements for your shares to be active assets have been satisfied.

Active asset test

As you had owned your shares in the company for less than 15 years as at the time of the CGT event, the shares are required to be active assets for at least half of this period. For a share in an Australian company to meet this requirement, the company must satisfy the 80 percent test for that same period.

You have also stated that these requirements have been satisfied and this basic condition will be satisfied.

Additional basic condition

Section 152-60 of the ITAA 1997 provides the meaning of CGT concession stakeholder. 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 small business participation percentage in the company at that time that is greater than zero.

An individual is a significant individual in a company if they have a small business participation percentage in the company of at least 20 per cent (section 152-55 of the ITAA 1997), which in your case, will be the direct small business participation percentage.

An entities direct small business participation percentage in a company is the percentage of:

(a) the voting power in the company or

(b) any dividend that the company may pay or

(c) any distribution of capital that the company may make.

The smaller or smallest applies if these percentages are different (section 152-70 of the ITAA 1997).

You have stated that you each had a direct small business participation percentage of 50 percent in the company just before the CGT event, and this condition is satisfied.

Conclusion

If you meet the maximum net asset value test, you will satisfy all of the above basic conditions and the small business 50 percent reduction in section 152-205 of the ITAA 1997 will apply in relation to CGT event K8 happening in relation to your down interests.

Question 3

Decline to rule

A private ruling is a written statement of the Commissioner's opinion of how a relevant provision applies, or would apply, to a particular entity in relation to a specified scheme.

The request you have made to which this question relates is for the Commissioner to exercise his discretion rather than provide an opinion on how a provision applies. Consequently the Commissioner declines to make a ruling on this issue. The Commissioner will, however, consider whether to exercise the relevant discretion.

Commissioner's discretion

The general rule is that a choice available under the CGT provisions, once made, cannot be changed. Such a choice must be made by the time the income tax return is lodged, or within such further time as the Commissioner allows (subsection 103-25(1) of the ITAA 1997).

A taxpayer who has considered the application of the CGT concessions and chosen a particular concession has made a choice which cannot later be changed. However, a taxpayer who did not consider the CGT concessions and accordingly included a capital gain in their income tax return has not made a choice and can, if the Commissioner allows further time, later make a choice for a CGT concession and amend their return to reduce or disregard the capital gain.

In determining if the discretion to allow further time to make the choice should be exercised, the Commissioner considers the following factors:

· whether there is evidence of an acceptable explanation for the period of extension requested and whether it would be fair and equitable in the circumstances to provide such an extension

· whether there is any prejudice to the Commissioner if the additional time is allowed, however the mere absence of prejudice is not enough to justify the granting of an extension

· whether there is any unsettling of people, other than the Commissioner, or of established practices

· fairness to people in like positions and the wider public interest

· whether there is any mischief involved and

· the consequences of the decision.

In your case, you have not acquired a replacement asset within the replacement asset period and there is no indication in your application that you intend to acquire a replacement asset if the discretion to allow further time to make the choice is exercised. Additionally, the replacement asset period has ended in your case and you have made no request for the Commissioner to extend the replacement asset period.

It would not be considered fair and equitable in the circumstances to provide you with an extension to choose the roll-over concession when you have not acquired a replacement asset and you have no intention to acquire a replacement asset.

While the Commissioner will not be prejudiced significantly by granting an extension, this is not sufficient to justify the granting of an extension in the circumstances.

You have evidenced an intention to experience a CGT event J5 at the end of the replacement asset period and subsequently access the retirement exemption, as available under the legislation which applies in the 2009 income year. Other people who made elections to access the retirement exemption during the 2007 income year would not have access to this legislation.

There does not appear to be mischief involved in requesting the extension of time.

The consequences of allowing an extension of time would be:

· removing the requirement to include capital gains in your 2007 income year assessments, as disregarded under the roll-over choice

· providing you with an extension to make a choice to apply the roll-over concessions and

· providing you with the opportunity to make a J5 CGT event at the end of the replacement asset period and then choosing the small business retirement exemption in the 2009 income year to disregard capital gains up to your CGT retirement exemption limit.

After considering the factors outlined above, the Commissioner will not provide you with an extension of time to make a choice in the circumstances.

Note

Another request can be made if you wish the Commissioner to consider granting further time in which to make the choice to apply the retirement exemption to any capital gains which should be included in your income tax returns for the 2007 income year.

Questions 4 and 5

As the answer to question 3 will not be yes, it is not necessary to answer these questions.