Edited version of your private ruling

Authorisation Number: 1012497167361

Ruling

Subject: Capital gains tax

Question 1

Did capital gains tax (CGT) event D1 occur when the Deed was executed?

Answer

Yes.

Question 2

Do you satisfy the basic conditions for the small business capital gains tax concessions in relation to the CGT event?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You and your spouse operated a business in partnership.

You and your spouse received a grant from the Commonwealth.

The first instalment was paid in the relevant financial year.

The grant was to payout the remaining loan on a vehicle which was used in the business.

A condition of the grant was that you and your spouse no longer undertook a certain type of work.

You and your spouse are also not able to re-enter the industry for a number of years after receiving the initial exit grant payment.

You and your spouse were allowed to retain ownership of the vehicle.

The partnership is a small business entity.  

The partnership commenced business prior to the 2000-01 financial year.

The partnership is still in business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-35

Income Tax Assessment Act 1997 subsection 104-35 (2)

Income Tax Assessment Act 1997 subsection 104-35 (5)

Income Tax Assessment Act 1997 subdivision 152-A

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 paragraph 152-10(1)(a)

Income Tax Assessment Act 1997 paragraph 152-10(1)(b)

Income Tax Assessment Act 1997 section 152-12

Income Tax Assessment Act 1997 subsection 960-100(1)

Reasons for decision

Question 1

CGT event D1 happens under section 104-35 of the Income Tax Assessment Act 1997 (ITAA 1997) 'if you create a contractual right or other legal or equitable right in another entity.' Subsection 104-35(2) states that the time of the event is when you enter in to the contract or create the other right.

Under subsection 960-100(1), an entity is defined as an individual, a body corporate, a body politic, a partnership, any other unincorporated association or body of persons, a trust or a superannuation fund.

The Commonwealth is an entity for the purpose of CGT event D1.

Under subsection 104-35(5) of the ITAA 1997, CGT event D1 does not happen if:

(a) you created the right by borrowing money or obtaining credit from another entity; or

(b) the right requires you to do something that is another CGT event that happens to you; or

(c) a company issues or allots equity interests or non-equity shares in the company; or

(d) the trustee of a unit trust issues units in the trust; or

(e) a company grants an option to acquire equity interests, non-equity shares or debentures in the company; or

(f) the trustee of a unit trust grants an option to acquire units or debentures in the trust.

Application to your circumstances

In this case, a contractual right was created when an agreement was entered into with the Commonwealth under which a grant was received in return for not re-entering an industry for a number of years. The exceptions outlined in subsection 104-35(5) of the ITAA 1997 do not apply in these circumstances. Therefore, CGT event D1 happened when the agreement was signed.

Question 2

To qualify for the small business concessions, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions.

The basic conditions in Subdivision 152-A of the ITAA 1997 (as relevant to this case) are:

· the small business entity test and

· the active asset test.

Small business entity

You will be a small business entity if you are an individual, partnership, company or trust that is carrying on a business and has an aggregated turnover of less than $2 million.

In this case, the information provided is that the partnership is a small business entity.

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied if:

· 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 test period detailed below, or

· 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 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

A CGT asset is an active asset if it is owned by you and is:

· used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or

· an intangible asset that is inherently connected with a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or another entity that is connected with you, carries on; for example, goodwill.

CGT event D1

There are special conditions for the active asset test if CGT event D1 occurs. The standard conditions in paragraphs 152-10(1)(a) and (b) of the ITAA 1997 do not apply, instead it is a basic condition under subsection 152-12 of the ITAA 1997 that the right you create that triggers the CGT event must be inherently connected with a CGT asset of yours that satisfies the active asset test.

Application to your circumstances

In this case, the partnership is a small business entity. As discussed in question 1, CGT event D1 happened upon the signing of the agreement. We consider that the right created in relation to the restrictive covenant, which triggered CGT event D1, will be inherently connected to the goodwill of the business.

Goodwill is an intangible asset that is inherently connected with the business the partnership has carried on for more than 10 years. Therefore, the goodwill will satisfy the active asset test.

As the right created that triggers the CGT event is inherently connected with the goodwill of the business, which is an active asset, the basic conditions have been satisfied.