Edited version of your written advice

Authorisation Number: 1051350994727

Date of advice: 10 April 2018

Ruling

Subject: Capital gains tax – small business concessions – individual sells shares in companies carrying on business

Question 1:

Will the Director satisfy the requirements of section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the sale of his Company P shares?

Answer:

Yes.

Question 2:

Will the Director satisfy the requirements of section 152-105 of the ITAA 1997 in respect of the sale of his Company D shares?

Answer:

Yes.

This ruling applies for the following periods:

2017-18 income year

2018-19 income year

The scheme commences on:

1 July 200A

Relevant facts and circumstances

The following entities are relevant to the questions raised:

Company D Pty Ltd (Company D):

Was registered with ASIC in 200A

Is just over F% owned by an unrelated individual

Owns the property that is the subject of this ruling (the Property) which is at least G% of the market value of assets it owns

Company P Pty Ltd (Company P):

● Was registered with ASIC in 200A

● Owns the business that operates out of the Property owned by Company D

● The Family Trust (the Trust)

● Has owned G% of the shares in Company P since 200B

● Acquired C% of Company D in 200B, later increased to H% and then about E%

● Ceased operating a share trading business during the 2015-16 income year

● Has not carried on a business since the share trading activity ceased

● Does not have any other affiliates

● Is not connected to any other entities that carry on business

● Has a corporate trustee

The Director (Director) is aged more than 55 years:

● Has owned D% of the shares in Company D since 200A

● Has owned D% of the shares in Company P since 200A

● Beneficially owns all the shares in the Trustee Company

● Is the sole director of Company D, Company P and the Trustee Company

● Does not carry on any businesses in their own name

● Does not have any other affiliates

● Is not connected to any other entities that carry on business

The unrelated individual does not carry on any businesses in their own name or in the name of any other associated entities and none of those entities have any other connection to Company D or Company P.

Company D acquired the Property some 15 years ago for use in a business to be carried on by Company P. It needed extensive work done prior to the commencement. Preparatory works commenced shortly after purchase and the construction of the main facility commenced about six months later.

The first clients moved in about 14 years ago. They were clients of another business then conducted by other entities run by associated entities.

Company P has operated the business from the Property from when the initial fitout was completed.

The rent charged by Company D to Company P is lower than market reflecting the close family relationship between the companies.

Company D has regularly paid expenses on behalf of Company P (and vice versa) and has subsequently been reimbursed.

Company D has constructed facilities of a type and in a timeframe in accordance with the requirements of Company P.

Company D has progressively built additional facilities on the Property each time the facility approached capacity.

The 2016-17 income year provides representative figures for the operation of the Property. During this year, Company P earned about $1,000,000 from operating the business and paid about $350,000 to Company D for the use of the Property. Company D also earns some minor amounts of interest unrelated to the Property.

Company P is an affiliate of Company D.

The Property is an active asset and meets the active asset test being used in the business carried on by Company P (as an affiliate of Company D).

The shares owned by the Director and the Trust in Company D are active assets and meet the active asset test as the Property, other active assets owned by Company D and associated assets have been greater than G% of the market value of all its assets for more than seven and a half years of the time they have owned the Company D shares (or more than half the ownership period where it is less than 15 years).

The shares owned by the Director and the Trust in Company P are active assets and meet the active asset test as the active assets owned by Company P and associated assets have been greater than G% of the market value of all its assets for more than seven and a half years of the time they have owned the Persis shares (or more than half the ownership period where it is less than 15 years).

The Director, the Trust, Company P and Company D each pass the maximum net asset value test as the net value of their CGT assets and the CGT assets of their connected entities and affiliates is less than $6,000,000.

The shareholders of Company D and Company P have received several expressions of interest in acquiring either the shares in those companies or their assets.

Assumptions

For the purpose of this ruling, it is assumed that the following events will occur during the period of the ruling:

● Company D will continue to derive income consistent with the amount disclosed above while it continues to own the Property

● Company P will continue to derive income consistent with the amount disclosed above while it continue to own the business

● No other related entity will operate a business activity

● The Director and the Trust will sell their Company D shares for a capital gain

● The Director and the Trust will sell their Company P shares for a capital gain

● The Trust will distribute all of its income from the sale year to the Director and their spouse, and

● The Director will retire as part of the sale transaction.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Subdivision 328-C

Reasons for decision

Question 1

Summary

The Director will satisfy the requirements of section 152-105 of the ITAA 1997 in respect of the sale of the Company P shares.

Detailed reasoning

Section 152-105 of the ITAA 1997 provides a CGT exemption if certain exemption conditions are satisfied.

The relevant conditions for an individual taxpayer selling a share in a company are:

● The basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the capital gain

● The taxpayer seeking the CGT exemption has continuously owned the share for the 15 years period ending just before the time of the CGT event

● The company had a significant individual for a total of at least 15 years during which the taxpayer owned the share, and

● The taxpayer is 55 years or over at the time of the CGT event and the event happens in connection with their retirement.

The basic conditions for an individual taxpayer selling a share in a company are:

● A CGT event happens to the share owned by the taxpayer

● The event would have resulted in a capital gain (before the application of Division 152 of the ITAA 1997)

● The taxpayer passes one of the owner tests

● The share satisfies the active asset test, and

● The taxpayer is a CGT concession stakeholder in the object company

The Director’s situation

CGT event A1 will happen when the Director sells the Company P shares resulting in a capital gain for the Director (prior to the application of the CGT small business concessions).

The Director is not carrying on a business, but the net value of the CGT assets and of the CGT assets of the Director’s connected entities and affiliates is less than $6,000,000 meaning that the Director passes the maximum net asset value test (which is an owner test).

The shares in Company P are active assets and meet the active asset test because the following have been G% or more of the market value of all of the assets of Company P for at least seven and a half years of the time that the Director has owned Company P shares:

● The market value of the active assets of Company P

● The market value of any financial instruments of Company P that are inherently connected with a business it carries on, and

● Any cash held by Company P that is inherently connected with such a business

The Director acquired all of their Company P shares in 200A and has held them for 15 years.

The Director holds D% of the Company P shares and this gives the director D% of the voting power in Company P, any dividend paid by Company P and any distribution of capital to be made that might be made by Company P. Therefore, the Director’s direct small business participation percentage is also D%.

Holding a direct small business participation percentage in Company P of D% is sufficient to make the Director a significant individual in Company P and also a CGT concession stakeholder in Company P.

The director also holds an indirect small business participation percentage in Company P through the Trust, but it is not necessary to work it out as the direct interest is sufficient to meet the required threshold.

The Director is over 55 year of age and the Director’s retirement will happen in connection with the sale of the Company P shares.

Therefore, the Director will meet the 15 year ownership condition and be eligible for the CGT exemption provided by section 152-105 of the ITAA 1997 in respect of the sale of the Company P shares.

Note: This private ruling applies the CGT small business concessions as currently enacted. It does not consider the possible application of announced but unenacted legislation that may have effect from 1 July 2017. Draft legislation related to CGT events that happen to shares was released on 8 February 2018.

Paragraph 51 of Taxation Ruling TR 2006/11 (paraphrasing section 357-85 of Schedule 1 to the Taxation Administration Act 1953) states:

The status of private rulings following a rewrite of the law

51. Where a relevant provision is re-enacted or remade, an earlier private ruling is taken to be about the re-enacted or remade provision insofar as the new law expresses the same ideas as the old law. However, if the law has been substantively changed, the part of the private ruling dealing with the changed law ceases to apply.

Question 2

Summary

The Director will satisfy the requirements of section 152-105 of the ITAA 1997 in respect of the sale of the Company D shares.

Detailed reasoning

Section 152-105 of the ITAA 1997 provides a CGT exemption if certain exemption conditions are satisfied.

The relevant conditions for an individual taxpayer selling a share in a company are as listed above.

The Director’s situation

CGT event A1 will happen when the Director sells the Company D shares resulting in a capital gain for the Director (prior to the application of the CGT small business concessions).

The Director is not carrying on a business, but the net value of the CGT assets and of the CGT assets of the Director’s connected entities and affiliates is less than $6,000,000 meaning that the Director passes the maximum net asset value test (which is an owner test).

The shares in Company D are active assets and meet the active asset test because the following have been G% or more of the market value of all of the assets of Company D for at least seven and a half years of the time that the Director has owned Company D shares:

● The market value of the active assets of Company D

● The market value of any financial instruments of Company D that are inherently connected with a business it carries on, and

● Any cash held by Company D that is inherently connected with such a business

The Director acquired all of the Company D shares in 200A and has held them for 15 years.

The Director holds D% of the Company D shares and this gives the Director D% of the voting power in Company D, any dividend paid by Company D and any distribution of capital to be made that might be made by Company D. Therefore, the Director’s direct small business participation percentage is also D%.

Holding a direct small business participation percentage in Company D of D% is sufficient to make the Director a significant individual in Company D and also a CGT concession stakeholder in Company D.

The Director also holds an indirect small business participation percentage in Company D through the Trust, but it is not necessary to work it out as the direct interest is sufficient to meet the required threshold.

The Director is over 55 year of age and the Director’s retirement will happen in connection with the sale of the Company D shares.

Therefore, the Director will meet the 15 year ownership condition and be eligible for the CGT exemption provided by section 152-105 of the ITAA 1997 in respect of the sale of the Company D shares.

Note: This private ruling applies the CGT small business concessions as currently enacted. It does not consider the possible application of announced but unenacted legislation that may have effect from 1 July 2017. Draft legislation related to CGT events that happen to shares was released on 8 February 2018.

Paragraph 51 of Taxation Ruling TR 2006/11 (paraphrasing section 357-85 of Schedule 1 to the Taxation Administration Act 1953) states:

The status of private rulings following a rewrite of the law

51. Where a relevant provision is re-enacted or remade, an earlier private ruling is taken to be about the re-enacted or remade provision insofar as the new law expresses the same ideas as the old law. However, if the law has been substantively changed, the part of the private ruling dealing with the changed law ceases to apply.