Edited version of private ruling

Authorisation Number: 1011680740455

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Ruling

Subject: Capital gains tax and small business concessions

Issue 1

Question 1

When the discretionary family trust (DFT) sells units in the private trust will it be considered a CGT stakeholder?

Answer

No

Question 2

Will the DFT be considered to have small business participation percentage in the private trust of at least 90%?

Answer

No

Question 3

Will the DFT receive small business relief on the sale of units in the private trust as identified above?

Answer

Small business relief may apply if all the conditions are satisfied under Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2012

The scheme commences on:

Already commenced

Relevant facts

A acquired his accounting practice (pre CGT) and operated from various locations for the last 20 years in various partnerships. A practiced as a sole trader since 1996.

A engaged his DFT to provide services to his practice.

DFT owns some plant and equipment and goodwill associated with the management of the practice. It also owns several commercial properties from which the practice has operated for the last 20 years.

For a few years A and his son conducted a business via the private trust.

The private trust has not yet really established any real goodwill value as the business is still running at losses.

A now proposes to restructure his practice under one entity. He proposes to modify the existing private trust to increase its number of units to 10,000.

A has created a new company named ABC Pty Ltd to be the new trustee for existing private trust.

100% of the units in the private trust will remain owned by FDT until sold/transferred after number of units increased to 10,000.

A is concerned about the tax consequences that relates to the sale of units in the trust by the discretionary trust to associates/employees.

A is to commence transition into retirement progressively after 2012 when he turns 55 years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-125

Income Tax Assessment Act 1997 sub section 152-10(1)

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 Subdivision 152-A, B, C, D and E.

Reasons For Decision

Issue 1

Question 1

CGT concession stakeholder

Section 152-60 of the ITAA 1997 defines an individual as a CGT concession stakeholder of a company or trust if they are a 'significant individual' or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero.

Section 152-125 of the ITAA 1997 allows a CGT concession stakeholder to receive an exempt amount from the company or trust where a company or trust has claimed the small business 15 year exemptions.

The amount disregarded will be limited to the extent of the CGT concession stakeholder's participation percentage (the individual's small business participation percentage).

Only an individual can be considered as a CGT stakeholder.

In your case, the DFT is a trust and therefore will not satisfy this requirement.

Question 2

Under paragraph 152-10(2)(b) of the ITAA 1997, section 152-10(2) of the ITAA 1997 will be satisfied if CGT concession stakeholders in the object company or trust together have a small business participation percentage in you of at least 90%.

Direct small business participation percentage

Section 152-65 of the ITAA 1997 states that an entity's small business participation percentage in another entity at a time is the percentage that is the sum of:

· the entity's direct small business participation percentage in the other entity at that time; and

· the entity's indirect small business participation percentage in the other entity at that time.

An entity's direct small business participation percentage in a trust, where entities have entitlements to all the income and capital of the trust, is the percentage of:

· the income of the trust that the entity is beneficially entitled to receive, or

· the capital of the trust that the entity is beneficially entitled to receive.

An entity's direct small business participation percentage in a trust, where entities do not have entitlements to all the income and capital of the trust, and the trust makes a distribution of income or capital, is the percentage of:

· distributions of income that the entity is beneficially entitled to during the income year, or

· distributions of capital that the entity is beneficially entitled to during the income year

Indirect small business participation percentage

An entity's indirect small business participation percentage in a company or trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity, and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.

The 90% test only applies if there is an interposed entity between the CGT concession stakeholders and the company or trust in which the shares or interests are held.

The interposed entity satisfies the test if 90% of the participation percentages in that entity are held by CGT concession stakeholders of the company or trust in which the shares or interests are held.

The DFT would not be considered to have a small business participation percentage because it is not a CGT concession stakeholder.

It should be noted that in the case of a discretionary trust being the interposed entity between the CGT concession stakeholders and the company or trust in which the shares or interests are held, the small business participation percentage in the discretionary trust of an individual who is a CGT concession stakeholder of the object company or trust is measured by reference to distributions the trust makes to him or her in the income year. That is, whether paragraph 152-10(2)(b) of the ITAA 1997 will be satisfied, will depend on the portion of the discretionary trust's income that was distributed (in the income year the CGT asset was disposed of) to an individual who is a CGT concession stakeholder of the object company or trust.

Question 3

A states that the DFT is a discretionary family trust which provides services to himself.

Any capital gain that results from a CGT event may be reduced or disregarded under the small business concessions if you satisfy certain conditions. All of the concessions require that the basic conditions in subsection 152-10(1) of the ITAA 1997 are satisfied.

The basic conditions for small business relief are contained in Subdivision 152-A of the ITAA 1997. These conditions are also listed in the "advanced guide to capital gains tax concessions for small business" which provides the Commissioner's view of the law in relation to the application of the small business concessions.

According to this guide the basic conditions to be met are in the form of three tests that must be satisfied:

· the maximum net asset value which sets a $6 million limit on the net value of assets that you and certain related entities can own

· the active asset test, and

· if the CGT asset is a share in a company or interest in a trust then:

· the controlling individual test and

· the individual claiming the concessions must be a CGT stakeholder in the company or trust.

Maximum net value asset is defined in section 152-15 of the ITAA 1997.

Active asset is defined in section 152-35 of the ITAA 1997.

If the DFT satisfies all the conditions in Subdivision 152-A of the ITAA 1997, it may then be eligible for the concessions specified in Subdivision 152-B, 152-C, 152-D and 152-E of the ITAA 1997