Edited version of private advice

Authorisation Number: 1051518372885

Date of advice: 18 September 2019

Ruling

Subject: Capital gains

Question 1

Will CGT event A1 occur on the contract date for disposal of the shares?

Answer

Yes. Under the provisions set out in section 104-10 of the Income Tax Assessment Act 1997, the Commissioners affirms the Capital Gains Tax (CGT) event A1 occurs on the contract date.

Question 2

Is the capital gain or loss included in the income tax return in the year of the capital gains tax event A1, once settlement occur for each respective tranche?

Answer

Yes. Tax Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income? The Commissioner views your situation suitably relates to TD 94/89 and therefore will be required to amend the tax return, the year the contract was signed, for each tranche once settled.

Question 3

Is the maximum net asset value (MNAV) test for the purpose of the small business capital gains tax concessions calculated just before the contract date for the sale?

Answer

Yes. When assessing your eligibility for the small business concession under the MNAV test you must calculate the market value of your net assets just before the CGT event.

In this case you must calculate the market value of your shares just before the CGT event. In ordinary circumstances this would be the value of the capital proceeds you are receiving, however as the exact amount of the capital proceeds are unknown you must attribute a reasonable market value to the shares when calculating your MNAV. For further information of on the maximum net asset value test, you can visit ato.gov.au and type in the search function QC52270.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 September 20XX

Relevant facts and circumstances

You are selling your shares to an unrelated third party, and they are an Australian resident company for tax purposes.

The details of the share sale have not been fully completed, and you have provided a draft of the sale agreement.

The payments will be split across the three tranches based on the percentage settling, and final tranche payment will 12 months after exit date.

The Shareholders Deed, stated in the contract of sale, is still being drafted, but it will cover the following:

·         Confidential information not being used to damage the business or shareholders;

·         Only making approvals and decisions in the best interests of the company;

·         Board composition after the contract is signed (e.g. how many directors and prior to completion of all tranches who can nominate their appointment/chairperson etc.);

·         Decisions which can be made with a simple majority vs a higher percentage;

·         Procedures regarding reporting of financial information to shareholders and who can request/access what information prior to the completion of all tranches;

·         Budgeting and business planning processes prior to the completion of all tranches;

·         Policies around the payment of dividends prior to the completion of all tranches;

·         Dispute resolution and deadlock clauses if there are disagreements.

The sales of the shares at each of the tranches will not be conditional once the contract has been executed.

You stated the market value of the business is less than $6m.

Further issues for you to consider

We have limited our ruling to the questions raised in your application. You advised that the taxpayer's have met the requirements of the capital gains tax (CGT) concessions for small business. The private ruling granted was issued on this basis the Commissioner did not consider the taxpayer's eligibility for the small business CGT concessions. Further information about the concessions can be found by searching for 'QC 22165' & 'QC 52266' on www.ato.gov.au

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 118-565

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-20