Edited version of private ruling

Authorisation Number: 1011866615346

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Ruling

Subject: Capital Gains Tax - Small Business Concessions

Question

1. Can the company pro rata the purchase price of the property to arrive at a cost base for each of the X property units that comprise the property under section 112-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The company can apportion the cost of the units by reference to the sale price of each unit to determine the cost base of each unit.

Question

2. Is the activity conducted by Shareholder A a business for the purposes of the small business CGT concessions under Division 152 of the ITAA 1997?

Answer

Yes. It is accepted that the activities carried on by Shareholder A amounted to the carrying on of a business for the purposes of the CGT Small Business Concessions.

Question

3. Can the small business CGT concession active asset test under section 152-35 of the ITAA 1997 apply to a certain number of the X property units?

Answer

Yes. The certain number of property units are considered to be active assets as a business was conducted on those premises by an entity connected with the company.

Question

4. Is Shareholder A the taxpayer's connected entity for the purposes of former subsection 152-40(1)(a)(ii) of the ITAA 1997?

Answer

Yes. Shareholder A is a connected entity as A was in a position to control the company through A's 50% shareholding.

Question

5. Are Shareholder A and Shareholder B CGT concession stakeholders for the purposes of section 152-60?

Answer

Yes. Both Shareholder A and Shareholder B each held a 50% interest in the company and between them held 100% of the voting power in the company and the rights to any dividends and distributions of capital that the company may make. Therefore they meet the definition of CGT concession stakeholder.

Question

6. Is the section 152-315 notice specifying in writing the CGT assets CGT exempt amount and the percentage of the CGT exempt amount that is attributable to each of the stakeholders sufficient to satisfy the requirements of section 152-315 of the ITAA 1997?

Answer

Yes. As the notice provided specifies the CGT exempt amount and the percentages attributable to each stakeholder it meets the requirements of section 152-315 of the ITAA 1997.

Question

7. Will the payment made on the particular date from a certain Fund to Shareholder A's trustee in bankruptcy trust account be treated as an advance of the ETP payable to Shareholder A as contemplated in the section 152-315 notice.

Answer

Yes. It is accepted that payment 'in advance' of any choice under section 152-315 nevertheless complies with the condition in paragraph 152-325(4)(b) of the ITAA 1997.

Question

8. Will the payment made to Shareholder B's deceased estate within 7 days of lodgement of the company's tax return for the year ended 30 June 200Y, be treated as an ETP satisfying the relevant company conditions contained in section 152-325?

Answer

Yes. The proposed payment complies with subsection 152-325(4) of the ITAA 1997. The small business retirement exemption will be available provided all other relevant conditions are met.

Relevant facts and circumstances

A number of years ago, the company was incorporated and at that time a $1 share was granted to each of Shareholder A and Shareholder B. Shareholder A held their share on trust for the Shareholder A Family Trust and Shareholder B held their share on trust for the Shareholder B Family Trust.

The company signed a contract for the sale and purchase of a property which comprised X unit titles Pursuant to the purchase contract, the company purchased the property for $XXXX

Shareholder A resigned as a director of the company and transferred A's shareholding to Shareholder B, to hold on behalf of the Shareholder A Family Trust).

The company by its director (Shareholder B) assigned to Shareholder B by a Deed of Assignment, the right to purchase the property. On the same date, Shareholder B also executed Declarations of Trust whereby B acknowledged that B held the property on trust for the company.

Shareholder B executed another Deed of Assignment of Contract, whereby the company assigned to Shareholder B all of the rights, title and interest in the Contract to Purchase the Property.

Shareholder B settled the purchase of the property. That purchase was partly funded by loans from a bank, secured by registered mortgages over the property.

From the date of settlement, Shareholder A and an associated entity occupied the property with the exception of one of the floors. Shareholder A operated a business from a number of units of the property.

During that time of occupation, Shareholder A and the associated entity paid rent to the company. There was no lease in place between the company, Shareholder B, Shareholder A and/or the associated entity.

In the subsequent year, a lease was entered into for the unoccupied unit of the property, in favour of an unrelated entity.

In a particular year, a legal matter arose between Shareholder A and Shareholder B . Shareholder A and the associated entity were permitted to remain in occupation of the property on the basis they attended to regular weekly payments into a trust account.

In a subsequent year, Shareholder A was made bankrupt and Shareholder B claimed outstanding rental payments from Shareholder A and the associated entity.

Shareholder A and the associated entity vacated the property..

The Property was sold in 200Y

The net proceeds from the sale of the property were deposited to a certain Fund.

Shortly after payments were made from the Fund to Shareholder A and Shareholder B.

Shareholder A is over 60 years of age.

Shareholder B passed away in a particular year.

Reasons for Decision

Apportionment of cost base

In 200X, company signed a contract for the sale and purchase of the property which comprised X property unit titles. Pursuant to the purchase contract, the company purchased the property for $XXXX plus GST. The contract did not specify a price for each of the units.

The units were sold separately in 200Y The cost of each unit was provided.

In order to determine the capital gain in respect of each unit it is necessary to establish the cost base of each separate unit.

Subsection 112-30(2) of the ITAA 1997 provides for an apportionment of the cost base where a CGT event happens to a part of a CGT asset. Although each of the units are separate CGT assets, the purchase price needs to be apportioned to each unit.

Subsection 112-30(3) of the ITAA 1997 sets out a formula for calculating the cost base of a part of a CGT asset to which a CGT event happened. This is done by multiplying the cost base of the whole asset by the capital proceeds from the CGT event happening to the part and dividing by the proceeds plus the market value of the remainder of the asset. Subsection 112-30(4) of the ITAA 1997 provides an example of the calculation.

It should be noted that the expression "market value" is not defined in the ITAA 1997 and therefore it takes its ordinary meaning. In this instance it would be reasonable to conclude that the market value of each unit at the time of the CGT event is the price that they were sold for.

Accordingly, we consider it reasonable to apportion the cost base of the units by reference to the sale price of each unit.

The CGT small business concessions

The basic conditions for relief are set out in section 152-10 of the ITAA 1997. These conditions are:

· A CGT event must happen in relation to a CGT asset that you own in an income year

· The event would, apart from Division 152 of the ITAA 1997, have resulted in a capital gain

· You satisfy the maximum net asset value test (section 152-15 of the ITAA 1997)

· The CGT asset satisfies the active asset test (section 152-35 of the ITAA 1997).

For entities wishing to claim the small business retirement exemption there are further conditions which must be met. These are set out in Subdivision 152-D of the ITAA 1997.

If the entity is a company or trust, it can choose to disregard all or a part of a capital gain if:

· It satisfies the basic conditions

· It satisfies the significant individual test

· It keeps a written record of the amount it chooses to disregard (the exempt amount). If there are more than one CGT concession stakeholders, each stakeholder's percentage of the exempt amount.

· It makes a payment to at least one of the CGT concession stakeholders by reference to each individual's percentage of the exempt amount.

The payment must not exceed the amount of the capital proceeds

If a CGT concession stakeholder is under 55 just before receiving a payment, an amount equal to that payment must be immediately paid to a complying superannuation fund or retirement savings account (RSA) on their behalf. The company or trust must notify the trustee of the fund or the RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption. If the CGT concession stakeholder was 55 or more there is no requirement to make this contribution.

The payment must be made by the later of:

· Seven days after you choose to disregard the capital gain, and

· Seven days after you receive the capital proceeds from the CGT event

If a company or trust chooses the retirement exemption after it receives the capital proceeds (for example, when you lodge your income tax return) there is no requirement to make any payment until you have made the choice. Accordingly, the capital proceeds may be used for other purposes before making the choice. However, once the choice is made, the payment must be made by the end of seven days after making the choice.

Active asset test

According to section 152-35 of the ITAA 1997:

(1)A CGT asset satisfies the active asset test 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 specified in subsection (2); 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 7 1/2 years during the period specified in subsection (2).

(2)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 to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

Section 152-40 of the ITAA 1997 sets out the meaning of 'active asset'. Generally, a CGT asset will be an active asset at a time if you owned the asset (whether the asset is tangible or intangible) and it was used, or held ready for use, in the course of carrying on a business or it was used, or held ready for use, in the course of carrying on a business by your affiliate, or by another entity connected with you.

Meaning of 'affiliate'

Section 328-130 of the ITAA 1997 provides the definition of 'affiliate':

'An individual or company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company.'

In relation to the 2006-07 and earlier income years former section 152-25 of the ITAA 1997 defined what was a "small business CGT affiliate". A person was a small business CGT affiliate if:

· the entity was an individual and the person was the individual's spouse or child under 18 years, or

· the person acted, or could be reasonably expected to act, in accordance with the entity's directions or wishes, or in concert with the entity.

Meaning of 'connected with'

Former section 152-30 of the ITAA 1997 (which applied to CGT events that happened in the 2006-07 year and earlier income years) explained when an entity was "connected with" another entity. An entity was connected with another entity if:

· either entity controlled the other; or

· both entities were controlled by the same third entity.

Meaning of CGT concession stakeholder

A further requirement for the CGT small business retirement exemption is that there must be at least one CGT concession stakeholder. Section 152-60 of the ITAA 1997 defines a CGT concession stakeholder as a significant individual in a company or trust or the spouse of a significant individual. A significant individual is a person who has a small business participation percentage in a company or trust of at least 20%. The small business participation percentage includes both direct and indirect percentages.

Application to your circumstances

2. Is the activity conducted by Shareholder A a business for the purposes of the small business CGT concessions under Division 152 of the ITAA 1997?

There is no definition of 'business' for the purposes of the CGT small business concessions nor are any businesses excluded from the concessions. In this instance Shareholder A conducted activites with a view to making a profit. It is accepted that the activities amounted to the carrying on of a business.

3. Can the small business CGT concession active asset test under section 152-35 of the ITAA 1997 apply to a certain number of the X units?

Yes. The certain number of units are considered to be active assets as a business was conducted on those premises by an entity connected with the company. The units were an active asset for at least one half of the period of ownership by the company as required by paragraph 152-35(1)(a) of the ITAA 1997.

4. Is Shareholder A the company's connected entity for the purposes of former subsection 152-40(1)(a)(ii) of the ITAA 1997?

Yes. Shareholder A is a connected entity as A was in a position to control the company through A's 50% shareholding. As the business was conducted by a connected entity the property units meet the definition of active asset.

5. Are Shareholder A and Shareholder B CGT concession stakeholders for the purposes of section 152-60 of the ITAA 1997?

Section 152-60 of the ITAA 1997 defines a CGT concession stakeholder as a significant individual in a company or trust or the spouse of a significant individual. A significant individual is a person who has a small business participation percentage in a company or trust of at least 20%. Both Shareholder A and Shareholder B each held a 50% interest in the company and between them held 100% of the voting power in the company and the rights to any dividends and distributions of capital that the company may make. Therefore they meet the definition of CGT concession stakeholder.

6. Is the section 152-315 notice specifying in writing the CGT assets CGT exempt amount and the percentage of the CGT exempt amount that is attributable to each of the stakeholders sufficient to satisfy the requirements of section 152-315 of the ITAA 1997?

Subsections 152-315(4) and (5) of the ITAA 1997 state that the CGT exempt amount must be specified in writing. If a company or trust has more than one CGT concession stakeholder, it must specify in writing the percentage of the CGT exempt amount that is attributable to each stakeholder. The percentages must add up to 100%. As the notice provided specifies the CGT exempt amount and the percentages attributable to each stakeholder it meets the requirements of section 152-315 of the ITAA 1997.

7. Will the payment made in 200Y from a certain Fund to Shareholder A's trustee in bankruptcy trust account, be treated as an advance of the ETP payable to Shareholder A as contemplated in the section 152-315 notice.

Section 152-325 of the ITAA 1997 states that a company or trust must make a payment to at least one of its CGT concession stakeholders if the company or trust receives capital proceeds from a CGT event for which it makes a choice under Subdivision 152-D of the ITAA 1997.

The Advanced guide to capital gains tax concessions for small business for the relevant (2006-07) income year provides that if you choose the retirement exemption after you received the capital proceeds there is no requirement to make any payment until you have made the choice. Accordingly, the company or trust can use the capital proceeds for other purposes before choosing. However, once the company or trust chooses, they must make payment by the end of seven days after making the choice.

As noted above, the Fund paid the amount to Shareholder A in the particular month 200Y. Shareholder A was a significant individual in the company under section 152-55 of the ITAA 1997 just before the CGT event, as a result of A's small business participation percentage of 50 per cent within section 152-65 of the ITAA 1997. Shareholder A was therefore a CGT concession stakeholder under section 152-60 of the ITAA 1997. The company now wishes to make a choice under section 152-315 of the ITAA 1997 that an amount from that payment should be disregarded. The amount becomes the CGT exempt amount under section 152-315 of the ITAA 1997.

The company, as noted above, has only now lodged a draft 200Y income tax return and section 152-315 notice in conjunction with this private ruling application. However the relevant payment under subsection 152-325(1) of the ITAA 1997 was made in late 200Y. It is accepted that payment 'in advance' of any choice under section 152-315 nevertheless complies with the condition in paragraph 152-325(4)(b) of the ITAA 1997 that payment must be made by the later of seven days after the company or trust makes the choice and seven days after the company or trust receives an amount of capital proceeds from the CGT event. Accordingly, the small business retirement exemption will be available to disregard the amount provided all other relevant conditions are satisfied.

8. Will the payment to Shareholder B's deceased estate within 7 days of lodgement of the company's tax return for the year ended 30 June 200Y, be treated as an ETP satisfying the relevant company conditions contained in section 152-325?

Shareholder B was a significant individual in the company just before the CGT event and hence a CGT concession stakeholder. There is nothing to preclude payment being made into the estate of Shareholder B. It is proposed that payment of the amount Shareholder B's solicitors will take place within seven days of lodgement of the company's 200Y income year tax return, which as noted includes the section 152-315 notice.

The Advanced guide to capital gains tax concessions for small business for 2007-08 and later income years confirms that in order to access the small business retirement exemption, it is not necessary for the amount to be paid into a superannuation fund, even if the deceased was less than 55 years of age at time of death. This applies whether it is an individual claiming the small business retirement exemption, or a company or trust claiming the exemption and consequently making payment to a CGT concession stakeholder. The Advanced guide for 2006-07-the year of the CGT event in question-does not directly address the issue, but it is accepted that the position as described above also holds for the 2006-07 income year.

The proposed payment therefore complies with subsection 152-325(4) of the ITAA 1997. Again, the small business retirement exemption will be available provided all other relevant conditions are met.