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Edited version of private advice
Authorisation Number: 1012678959361
Ruling
Subject: Capital gains tax (CGT) concessions for small business
Question
Can you distribute 100% of the capital gain (the exempt amount) to Individual A (whether directly or indirectly through interposed entities)?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2015
Year ended 30 June 2016
The scheme commences on
1 July 2014
Detailed reasoning
You purchased a commercial property before 20 September 1985.
You used the property in a retail business carried on by you.
You then leased the property to a third party until the property was sold. You made a capital gain on the sale of the property.
Your shareholders just before the property was sold were Individual A, Discretionary Trust B and Discretionary Trust C.
All shares have the same voting rights and the same rights to your income and capital.
In the year ended 30 June 2014 Individual A and Testamentary Trust B each received 50% of the distributions from Family Trust C.
In the year ended 30 June 2014 Individual A received 100% of the distributions from Testamentary Trust B.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152
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 section 152-70
Income Tax Assessment Act 1997 section 152-75
Income Tax Assessment Act 1997 section 152-110
Income Tax Assessment Act 1997 section 152-125
Income Tax Assessment Act 1997 subsection 152-125(2)
Reasons for decision
Distributions of the exempt amount
Payments to a company's CGT concession stakeholders are exempt if:
• a capital gain of the company would have been disregarded under the small business 15-year exemption, or would have been except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985, and
• the company makes one or more payments (whether directly or indirectly through one or more interposed entities) in relation to the exempt amount within 2 years after the relevant CGT event to an individual who was a CGT concession stakeholder of the company just before the event (section 152-125 of the Income Tax Assessment Act 1997 (ITAA 1997)).
The total payments to each CGT concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholder's small business participation percentage by the exempt amount (subsection 152-125(2) of the ITAA 1997).
CGT concession stakeholder
An individual is a CGT concession stakeholder of a company if they are a significant individual in the company (section 152-60 of the ITAA 1997).
Significant individual
An individual is a significant individual in a company at a time if, at that time, the individual has a small business participation percentage in the company of at least 20% (section 152-55 of the ITAA 1997).
Small business participation percentage
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 (section 152-65 of the ITAA 1997).
An entity's direct small business participation percentage in a company is the percentage of:
• voting power that the entity is entitled to exercise
• any dividend payment that the entity is entitled to receive
• any capital distribution that the entity is entitled to receive, or
• if they are different, the smallest of the three percentages above (section
152-70 of the ITAA 1997).
An entity's indirect small business participation percentage in a company 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 (section 152-75 of the ITAA 1997).
Application to your circumstances
In your case, the capital gain of the company would have been disregarded under the small business 15-year exemption in section 152-110 of the ITAA 1997 except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985.
As Individual A is a CGT concession stakeholder in you with a total small business participation percentage of 100% you can distribute the CGT exempt amount to Individual A (whether directly or indirectly through Family Trust C and/or Testamentary Trust C).
The distributions will not be included in the assessable income of Individual A (or be deductible to you or any of the interposed entities) provided you make the distributions within two years of the CGT event that resulted in the capital gain, or in appropriate circumstances, within such further time as allowed by the Commissioner.