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Ruling
Subject: Small business capital gains tax concessions
Question
Can company A apply the small business capital gains tax concessions in relation to the capital gain made on the shares sold in company B?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
Company A is a small business entity.
The shares in company A are equally held by 5 individuals.
Two of the shareholders in company A are also share holders in company B.
The shares company A held in company B were purchased over multiple transactions.
Company A owned a total of X shares in company B. This was X% of the total shares issued by company B.
Theses shares are the only assets held by company A.
In the 2012-13 financial year, company A sold all of the shares it held in company B.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152,
Income Tax Assessment Act 1997 section 152-10(2),
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 152-65,
Income Tax Assessment Act 1997 subsection 152-70(1), and
Income Tax Assessment Act 1997 section 152-75.
Reasons for decision
To qualify for the small business capital gains tax (CGT) concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions.
A capital gain that you make may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied:
A CGT event happens in relation to a CGT asset of yours in an income year,
The event would have resulted in a gain,
The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and
At least one of the following applies;
a) you are a small business entity for the income year,
b) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997,
c) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or
d) you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.
Additional basic conditions for shares in a company
Under subsection 152-10(2) of the ITAA 1997, if the CGT asset is a share in a company or an interest in a trust (the object company or trust), one of these additional basic conditions must be satisfied just before the CGT event:
you are a CGT concession stakeholder in the object company or trust;
or
CGT concession stakeholders in the object company or trust together have a small business participation percentage in you of at least 90%.
A company cannot satisfy the condition in paragraph (a) because a CGT concession stakeholder in the object company must be an individual.
CGT concession stakeholder
As per section 152-60 of the ITAA 1997 an individual is 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.
Under section 152-55 of the ITAA 1997 an individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. This 20% can be made up of direct and indirect percentages.
Small business participation percentage
Under section 152-65 of the ITAA 1997 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.
Under subsection 152-70(1) of the ITAA 1997 an entity's direct small business participation percentage in a company is the percentage of:
a) voting power that the entity is entitled to exercise
b) any dividend payment that the entity is entitled to receive, or
c) any capital distribution that the entity is entitled to receive, or
d) if they are different, the smallest of the three definitions above.
Section 152-75 of the ITAA 1997 details that 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.
Application to your circumstances
In this case, company A sold shares that it held in company B. In order to access the small business concessions not only will the company have to satisfy the standard basic conditions, but also the additional basic condition or '90% test' set out in subsection 152-10(2) of the ITAA 1997.
To satisfy this test, the CGT concession stakeholders in company B (the object company) together must have a small business participation percentage in company A of at least 90%.
Only two shareholders of company A have a small business participation percentage in company B of at least 20%. Therefore, these individuals are significant individuals and CGT concessions stakeholders of company B.
As stated above, to satisfy the 90% test the CGT concession stakeholders in company B together must have a small business participation percentage in company A of at least 90%. Together, these individuals have a small business participation percentage in company A of less than 90%
As only two of the shareholders in company A are CGT concession stakeholders in company B, the company does not satisfy the 90% test outlined in subsection 152-10(2) of the ITAA 1997. Therefore, company A is not entitled to the small business capital gains tax concessions.