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Edited version of your written advice
Authorisation Number: 1051190263861
Date of advice: 16 February 2017
Ruling
Subject: Small business capital gains tax concessions
Question
Do you satisfy the basic conditions for the small business capital gains tax (CGT) concessions?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commences on
1 July 2015
Relevant facts and circumstances
Individual A is a co-founder of a company which was incorporated in XXXX.
The shares in the company were owned by the partnership. The partnership consisted of company B and a Family Trust.
The Family Trust is a discretionary trust. Individual A is the primary beneficiary.
The company was sold to another company in the 20XX-XX financial year.
The scrip for scrip rollover was applied as it was a 100% takeover.
The partnership sold shares in the other company in 20XX.
The partnership held less than 1% of the shares in the company just prior to the sale.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 152-10
Income Tax Assessment Act 1997 subsection 152-10(2)
Income Tax Assessment Act 1997 section 152-15
Income Tax Assessment Act 1997 section 152-55
Income Tax Assessment Act 1997 section 152-60
Reasons for decision
In order to apply the CGT small business concessions to a capital gain, the basic conditions contained in section 152-10 of the ITAA 1997 must be met. Where the relevant CGT asset is a share in a company, an additional condition must be met.
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:
(a) you are a CGT concession stakeholder in the object company or trust;
or
(b) CGT concession stakeholders in the object company or trust together have a SBPP in you of at least 90%.
A company or trust 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 SBPP 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 SBPP 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 SBPP in another entity at a time is the percentage that is the sum of:
● the entity's direct SBPP in the other entity at that time, and
● the entity's indirect SBPP in the other entity at that time.
Under subsection 152-70(1) of the ITAA 1997 an entity's direct SBPP in a trust where entities do not have entitlements to all the income and capital of the trust is:
● where the trustee makes distributions of income during the income year (relevant year) in which the CGT event occurs - the percentage of distributions that entity was beneficially entitled to
● where the trustee makes distributions of capital during the relevant year - the percentage of distributions that entity was beneficially entitled to, or
● if they are different, the smallest of the two definitions above.
An entity's direct small business participation percentage in a company is determined according to their entitlements just before the CGT event, rather than during the relevant year. It 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 definitions above.
Section 152-75 of the ITAA 1997 details that an entity's indirect SBPP 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 in order to apply the small business concessions the additional basic must be satisfied. As the partners are not individuals they cannot satisfy paragraph (a) in subsection 152-10(2) of the ITAA 1997.
The partners held an interest of less than 1% in the company just prior to the CGT events. Given the information provided we consider there are no CGT concession stakeholders in the object company. Therefore paragraph 152-10(2)(b) of the ITAA 1997 cannot be satisfied and the entities are not eligible for the small business CGT concessions.