| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your private ruling
Authorisation Number: 1012496188075
Ruling
Subject: Exempt capital gain component
Questions and Answers:
1. Will your receipt of the 'exempt' 50% component, of the capital gain from the sale of the company business, be treated as capital proceeds for the cancellation of your shares in the company, if it is paid as a liquidator's interim distribution and followed, within 18 months, by the dissolution of the company?
Yes.
2. As a shareholder of the company, can you claim the 50% CGT discount on this distribution?
Yes.
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You are one of a number of original shareholders of the company, which was registered in 200X, after which the company purchased a business franchise. In the relevant year, the business was sold, resulting in a net capital gain on the business goodwill.
The company applied the 50% small business active asset exemption to the gain, after which the small business retirement exemption was applied to the remaining profit, on behalf of you and your shareholder spouse. The retirement exemption portion was distributed to you within 7 days.
The shareholders of the company now wish to distribute the 50% exempt small business active asset portion to the shareholders and, then, wind up the company.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 47
Income Tax Assessment Act 1997 Section 104-25
Income Tax Assessment Act 1997 Section 104-135
Income Tax Assessment Act 1997 Section 115-25
Reasons for decision
Subsection 47(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides:
Distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it.
The effect of section 47 is it acts to treat distributions of profits that were tax free to a company as also tax free in the hands of its shareholders.
This outcome is explained in Taxation Determination TD 2001/14, which explains a distribution by a liquidator of the 'exempt' 50% component of a capital gain, attributable to goodwill, is not deemed to be a dividend because the 'exempt' 50% component is not 'income derived by the company', according to ordinary concepts, for the purposes of subsection 47(1) of the ITAA 1936.
(Note: Subsection 47(2B) of the ITAA 1936 provides where the company does not cease to exist within a period of three years after the distribution or within such further period as the Commissioner allows, the distribution shall be deemed to be taxable dividends paid by the company to the shareholders.)
However, TD 2001/14 also explains that a final distribution by a liquidator of the 'exempt' 50% component represents capital proceeds from the ending of the shareholder's shares in the company, for the happening of CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997).
Where a company is dissolved more than 18 months after payment of an interim distribution, the payment is treated as a capital payment for shares under CGT event G1 in section 104-135 of the ITAA 1997. (You may also refer to Taxation Determination TD 2001/27).
Where the relevant shares are pre-CGT assets, any capital gain made is disregarded under subsection 104-135(5) of the ITAA 1997. Otherwise, where the relevant shares are post-CGT assets, subsection 115-25(3) of the ITAA 1997 does not exclude CGT event C2 or CGT event G1 from discount capital gain.
Section 115-25 of the ITAA 1997 provides to be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.
In your case, subject to subsection 47(2B) of the ITAA 1936, a distribution by a liquidator, of the 'exempt' 50% component of the capital gain attributable to goodwill, will not be assessable income under subsection 47(1A) of the ITAA 1936. This is because subsection 47(1A) treats your personal capital gain, from the distribution, in the same manner as the company's capital gain.
However, the full amount of a distribution by a liquidator, of the 'exempt' 50% component of the capital gain attributable to goodwill, will constitute capital proceeds from the ending of the your shares in the company, for the happening of CGT event C2 or CGT event G1 under section 104-25 or section 104-135 of the ITAA 1997.
As you acquired your shares in the company at least 12 months before the CGT event, the full amount of a distribution by a liquidator, of the 'exempt' 50% component of a capital gain attributable to goodwill is discountable under section 115-25 of the ITAA 1997.