Edited version of your written advice

Authorisation Number: 1051475602540

Date of advice: 23 January 2019

Ruling

Subject: Small business retirement exemption

Question

Will Trust A meet the conditions in subsection 152-325(1) of the Income Tax Assessment Act 1997 when the business purchaser issues shares directly to a self-managed superannuation fund for the CGT concessions stakeholders under the agreement with Trust A?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2019

The scheme commences on:

November 2018

Relevant facts and circumstances

Trust A is a discretionary trust. The trustee of Trust A is Company B (the Trustee).

Individual A is the sole director of the Trustee, and is a potential beneficiary of Trust A.

Individual B is a potential beneficiary of Trust A.

Both Individual A and Individual B are CGT concession stakeholders of Trust A for the 2018/19 income year, and are both under 55 years of age.

The Trustee in its capacity as trustee for Trust A operates a business.

The Trustee for the Trust A is contemplating the sale of its business, including goodwill. At this time there is no written contract for sale of the business.

As proposed, under the agreement with the purchaser, as consideration for the sale of the goodwill, the purchaser will promise to:

● pay money in the amount of $X to Trust A; and

● issue shares to the value of $Y to a self-managed superannuation fund as contributions for Individual A and Individual B.

The shares to be issued are from the initial public offering (IPO) of a new public company of the purchaser.

The proposed purchaser of the Business is unrelated to Trust A, the Trustee or any of the beneficiaries of Trust A.

At this time there is no product disclosure statement for the IPO. The IPO shares will not be issued at a discounted price. The number of shares to be issued will be determined using market value.

The Business sale is proposed to settle in May 2019, and the shares will be listed on the Australian Stock Exchange on the same day.

Relevant legislative provisions

Income Tax Assessment Act 1997

subsection 116-20(1)

subdivision 152-D

section 152-325

subsection 152-325(1)

subsection 152-325(7)

Reasons for decision

Detailed reasoning

The small business retirement exemption (the retirement exemption) was introduced to provide relief to small business entities when selling active assets of the business, where all or part of the proceeds from the sale are used for the retirement of individuals who controlled that business.

Among other conditions not considered in this ruling, the conditions in subsection 152-325(1) and (7) of the ITAA 1997 must be met for a trust to choose to disregard all or part of a capital gain from a CGT event under the retirement exemption in Subdivision 152-D.

Subsection 152-325(1) of the ITAA 1997 states:

A company or trust must make a payment (whether directly or indirectly through one or more interposed entities) to at least one of its CGT concession stakeholders if:

(a) the company or trust makes a choice under this Subdivision [about the retirement exemption] to disregard a capital gain from CGT event J2, J5 or J6; or

(b) the company or trust receives an amount of capital proceeds from a CGT event for which it makes a choice under this Subdivision.

In Trust A’s circumstances, paragraph 152-325(1)(b) of the ITAA 1997 is the relevant provision as neither of CGT Event J2, J5 or J6 apply.

As such, if you receive an amount of capital proceeds from a CGT Event for which you make a choice under the retirement exemption provisions, you must make a payment (whether directly or indirectly through one or more interposed entities) to at least one of Trust A’s CGT concession stakeholders, Individual A and Individual B, for this condition to be satisfied.

Will Trust A ‘receive capital proceeds’ if the shares are issued directly to the SMSF?

Subsection 116-20(1) provides that the capital proceeds from a CGT event are the total of:

(a) The money you have received, or are entitled to receive, in respect of the event happening; and

(b) The market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).

The meaning of the word ‘property’ depends on the context in which it is found. Courts of law have found that the word is of “wide import” (Danubian Sugar Factories v IR Commrs (1901) 1 QB 245 at p 257) and is of “very general meaning and comprehensiveness” (The Smelting Company of Australia Ltd v IR Commrs (1898) 2 QB 179 at p 183). In Jones v Skinner (1836) 5 LJ Ch 90, Langdale MR said:

“‘Property’ is the most comprehensive of all terms which can be used, inasmuch as it is indicative and descriptive of every possible interest that a party can have.”

The word ‘property’ represents proprietary rights that may exist in relation to physical objects or to intangible things (McCaughey v Commr of SD (1945) 46 SR (NSW) 192 at p 201).

In respect of the proposed sale, and as consideration for the sale of the goodwill, you will receive money of $X.

Under the agreement with the Purchaser you will not receive, or be entitled to ‘receive’, the shares. However, you will receive the Purchaser’s promise to issue the shares to the SMSF as contributions of Individual A and Individual B. As the sale is an arm’s length transaction, the value of the property you sold in exchange for that promise (being $Y of goodwill) is the market value of that promise.

As such, under subsection 116-20(1) of the ITAA 1997, Trust A will receive capital proceeds to the value of $Z under the proposed sale for the purpose of subsection 152-325(1).

Will Trust A ‘make a payment’ for the purpose of subsection 152-325(1) and (7) if the shares are issued directly to the SMSF by the Purchaser?

Further to subsection 152-325(1) of the ITAA 1997, in relation to the payment to be made, subsection 152-325(7) of the ITAA 1997 states:

If a CGT concession stakeholder is under 55 just before a payment is made under this section in relation to him or her:

(a) the company or trust must make the payment to the CGT concession stakeholder by contributing it for the stakeholder to a complying superannuation fund or an RSA in respect of the stakeholder; and

(b) the company or trust must notify the trustee of the fund or the RSA provider at the time the contribution is made that the contribution is made in accordance with this section.

In ATO Interpretative Decision ATO ID 2010/217 Income Tax Capital gains tax: small business concessions - retirement exemption - contribution to complying superannuation fund - transfer of real property (ATO ID 2010/217) we consider that, for the purposes of the retirement exemption, a payment can be made to a superannuation fund by transferring property, instead of paying cash.

However, the circumstances in the ATO ID 2010/17 differ from Trust A’s circumstances in three ways.

Firstly, in the ATO ID, the small business entity that is selling its active asset is an individual as opposed to a trust. However, the ATO ID includes the following note:

Note: where a company or trust chooses the retirement exemption and a CGT concession stakeholder is under 55 just before a payment is made in relation to them, there is a similar requirement for the company or trust to contribute the payment to a complying superannuation fund or an RSA (paragraph 152-325(7)(a) of the ITAA 1997). The view expressed above that a transfer of real property to a complying superannuation fund can satisfy the requirement to make a contribution also applies to the requirement to make a contribution under paragraph 152-325(7)(a) of the ITAA 1997.

The note confirms that where a trust has circumstances that are the same as those of the individual in the ATO ID, we consider that the trust can make a payment by transferring property.

Secondly, in the ATO ID, the property transferred is owned by the entity making the payment. Under Trust A’s proposed sale, the shares are being issued directly by the Purchaser of the business to the SMSF, and will never be received or owned by Trust A. As such, it is necessary to consider whether Trust A is considered to be ‘making’ a, or the, payment for the purpose of subsection 152-325(1) and (7) of the ITAA 1997 in these circumstances.

The word ‘make’ has wide meaning. According to the online edition of the Macquarie Dictionary (retrieved 16 January 2018 from http://www.macquariedictionary.com.au), one meaning is ‘to cause to be or become’.

Having regard to the context and intent of the retirement exemption provisions, we consider that by entering into a contract or agreement that requires the Purchaser to issue the shares to the SMSF, Trust A will cause the share issue to be; and will make a payment, or the payment, of the issued shares to the SMSF for the purpose of subsections 152-325(1) and (7) of the ITAA 1997.

Lastly, in the ATO ID, the property transferred is real property as opposed to shares. As such, it is necessary to consider if the share issue will cause the SMSF to breach section 66 of the Superannuation Industry (Supervision) Act 1993 (SISA) and, consequently, whether Trust A is making the payment to a ‘complying’ superannuation fund for the purpose of subsection 152-325(7) of the ITAA 1997.

Under section 66 of the SISA, superannuation providers are prohibited from acquiring certain assets from a related party, such as a member. However, an exception to the prohibition is provided in subsection 66(2) of the SISA where the asset acquired is a listed security acquired at market value.

Under the proposed arrangement, the IPO shares will be listed on the Australian Stock Exchange prior to being issued to the SMSF, and will not be issued at a discounted price. In these circumstances, the SMSF will be acquiring listed shares at market price and the acquisition will not breach section 66 of the SISA.

As such, we consider that Trust A will meet the conditions in subsections 152-325(1) and (7) of the ITAA 1997 where the purchaser issues shares directly to a SMSF for the CGT concessions stakeholders under the agreement with Trust A.