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Ruling

Subject: CGT - small business concessions

Question

Is the amount paid to the bank on behalf of the CGT concession stakeholder a payment made directly by the company to the stakeholder in relation to the exempt amount for the purposes of paragraph 152-125(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

1 July 2011 to 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

A company made a capital gain from the sale of an active asset.

The company is 100% owned by an individual who was at least 55 years old at the time of the disposal event. The individual is a CGT concession stakeholder of the company.

The company satisfies the small business entity test and the conditions for the small business 15-year exemption.

The company had an outstanding loan with a bank.

The individual shareholder also had outstanding liabilities with the same bank.

The active asset was used as security by the bank for the borrowings to both the company and the individual shareholder.

The bank attended the settlement for the sale of the active asset and ensured that part of the capital proceeds from the disposal of the active asset was applied to pay the outstanding loans of the company and of the individual shareholder. As a result, the company did not receive that part of the capital proceeds directly at settlement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 103

Income Tax Assessment Act 1997 section 103-10

Income Tax Assessment Act 1997 subsection 103-10(1)

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 subsection 116-20(1)

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 section 152-125

Income Tax Assessment Act 1997 paragraph 152-125(1)(b)

Reasons for decision

If a capital gain (the exempt amount) is disregarded under section 152-110 of the ITAA 1997, and you make one or more payments in relation to the exempt amount within 2 years after the relevant CGT event to an individual who was a CGT concession stakeholder of you just before the event, the payment(s) are also exempt and are therefore not taken into account in determining the individual's taxable income (section 152-125 of the ITAA 1997).

Section 116-20 of the ITAA 1997 sets out the general rules about capital proceeds from a CGT event. The capital proceeds from a CGT event are the total of:

· the money you have received, or are entitled to receive, in respect of the event happening; and

· the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event) (subsection 116-20(1) of the ITAA 1997).

In some situations you are treated as having received money or other property, or being entitled to receive it: see section 103-10 of the ITAA 1997 (Note 2 to subsection 116-20(1) of the ITAA 1997).

Division 103 of the ITAA 1997 sets out some general rules that apply to the provisions dealing with capital gains and capital losses. The rules provide that if money or property is applied for your benefit (including the discharge of a debt), or as you direct, the CGT provisions apply as if the money or property was actually received by you (subsection 103-10(1) of the ITAA 1997).

In your case, the amount applied to your bank loan is treated as having been received by you as part of the capital proceeds from the disposal of the active asset. The money was applied for your benefit, that is, to discharge your debt.

When an asset is sold it is general practice for the seller to give written instructions to the bank to pay out whatever liabilities are secured under a charge over the asset, and to apply the balance in the way directed by the seller. In your case, you instructed the bank to pay out the loan owed by the shareholder, which was secured by a charge over the active asset.

You are taken to have received the money when it was applied as directed by you, that is, to pay out the loans owed by the shareholder. As such, you are taken to have made a payment to the individual shareholder, who was a CGT concession stakeholder of you just before the CGT event happened.

Accordingly, the amount paid to the bank on behalf of the CGT concession stakeholder is a payment made directly by the company to the stakeholder in relation to the exempt amount for the purposes of paragraph 152-125(1)(b) of the ITAA 1997. The amount paid is not included in the assessable income of the CGT concession stakeholder and is not deductible to the company.