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Edited version of your written advice
Authorisation Number: 1051437769331
Date of advice: 8 October 2018
Ruling
Subject: Capital gains tax - small business concessions - company - pre-CGT asset
Question
Is the Company entitled to apply the 15 year exemption to the capital gain on the sale of the Property?
Answer
No
This ruling applies for the following periods:
1 July 2017 to 30 June 2018
1 July 2018 to 30 June 2019
The scheme commences on:
1 July 2017
Relevant facts and circumstances
The Deceased carried on a farming business in partnership with Person One until a date in 197X when the operation moved to a company structure.
Company
The Company was incorporated on a date in 197X.
Purchase of land by company
In 197X the Company purchased the Property.
The Property includes a dairy which has used by the Company in its operations in conjunction with land owned privately by the individuals throughout the entire period of ownership.
Shares
Upon incorporation the company issued XX $1 ordinary shares divided into A, B C, & D class shares.
Article x further states that the Directors may declare dividends to:
● one or more class of shares to the exclusion of other classes.
● at different rates on different classes of shares respectively.
● on any particular share or shares to the exclusion of other shares
On a date in 199W the Deceased purchased the C class shares from a relative.
On a date in 199W Person One purchased the D class shares from a relative.
The Deceased passed away on a date in 199X.
Person One, Person Two and Person Three continued the farming operation through the Company after the deceased passed away.
Person One, Person Two and Person Three are Directors of the Company.
On their passing, the Deceased left all of their shares in the Company to Person One, as life tenant and Person Two and Person Three as tenants in common in equal shares in remainder.
On a date in 199X, Person One, in their capacity as executor of the estate of the Deceased, transferred legal ownership of the Class A shares and Class C shares to them self as life tenant, and Person Two and Person Three as tenants in common in equal shares in remainder.
Basic conditions
The Company is a small business entity for the purposes of capital gains tax small business concessions.
The Company is an associate of Person One, Person Two and Person Three.
The Company acts in concert with Person One, Person Two and Person Three.
Sale
The Company entered into a contract for the sale of the Property for $X,XXX,000 on a date in 201X. The sale settled on a date in 201X.
The Company made a gain on the sale of the property. The Company will account for the gain on the sale via a separate capital reserve on the balance sheet.
Dividend
The Company will make a payment of a portion of the proceeds of the sale to Person One in their capacity as owner of 100% of the dividend rights.
Company to be wound up
The Company will be wound up in the 201Y income year.
All shares in the Company will be cancelled when the Company is wound up.
Remaining capital will be distributed to shareholders on liquidation.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 152-10
Income Tax Assessment Act 1997 section 152-35
Income Tax Assessment Act 1997 section 152-110
Income Tax Assessment Act 1997 section 152-105
Income Tax Assessment Act 1997 section 152-125
Income Tax Assessment Act 1997 section 104-10
Income Tax Assessment Act 1997 section 104-25
Income Tax Assessment Act 1997 section 149-15
Income Tax Assessment Act 1997 section 149-30
Income Tax Assessment Act 1936 section 47(1)
Reasons for decision
Question
Summary
The Property was a pre-capital gains tax (CGT) asset in the Company and therefore exempt from CGT. The small business concessions (SBC) cannot apply to already exempt amounts. However, the Company would also have met the criteria to be exempt under the 15 year rule if it was not a pre-CGT asset.
Detailed reasoning
The Property was purchased prior to 20 September 1985. Assets owned prior to this date are generally pre-CGT assets, and CGT does not apply to any gains made on their disposal. However, assets held in a company can lose their pre-CGT status if there is a change in the majority underlying ownership of the company.
An asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not held by the ultimate owners who had a majority underlying interests in the asset immediately before 20 September 1985.
Majority underlying interests in a CGT asset consist of:
(a) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and
(b) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.
Where shares are transferred to a person upon the death of another person, that person is taken to have held the same interests as those held by the former owner.
Application to your circumstances
In your case, prior to 20 September 1985 the Deceased owned XX% of the shares in the company and Person One owned XX% of the shares in the company.
Two other relatives each owned XX% of the shares in the company.
In 199W, the Deceased and Person One each acquired a XX% share of the interests in the Company from the two relatives.
The change to the underlying interests in the company in 199W applied to less than 50% of the ownership interests in the company and did not affect the pre CGT status of the land at that time. The interests were still held by shareholders who had held them before 1985.
After 199W, the Deceased owned XX% of the shares in the company, and Person One owned XX% of the shares in the company.
When the Deceased passed away in 199X, their 60% interest in the company was transferred to Person One as a life estate, and Person Two and Three as tenants in common in equal shares in remainder.
Because the shares owned by the Deceased were acquired Person One, Person Two and Person Three due to their death, they are taken to have held the same interest as the Deceased prior to their death.
Therefore, the change in ownership of the shares when the Deceased passed away did not affect the pre CGT status of the property in the Company. The land retains its pre CGT status.