Edited version of private advice

Authorisation Number: 1051749560893

Date of advice: 16 September 2020

Ruling

Subject: CGT - small business concessions

Question

Can you apply the small business capital gains tax (CGT) concessions to reduce or disregard the capital gain you made on the disposal of your shares in the company?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

On incorporation of the company you beneficially owned 20% or more of the issued shares in it.

The company set out to raise money to start its business through bank finance; however, these efforts were unsuccessful.

With assistance from an individual enough funds were raised from private investors for the company to commence business.

As the company was forced to take equity investment over debt your individual shareholding in the company was reduced to less than 10%.

You were a director of the business and sat on the Board of Directors.

The business had significant growth in its early years.

As the business grew there was additional need for capital. You were issued with performance shares in the company and investors were issued with shares based on their further investments. This further reduced your overall shareholding in the company.

A buyer indicated they would like to purchase the company.

The buyer agreed to buy out all the investing shareholders under a share purchase agreement.

A separate share purchase agreement was entered into between the original shareholders and the buyer whereby the buyer agreed to buy out the original shareholders under an earnout arrangement. The original shareholders agreed to remain in the business for a minimum amount of time and they were to share in the value/upside created in the business over that period.

All shares in the company carried the same rights to income, capital and voting.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-50

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-70

Income Tax Assessment Act 1997 section 152-75

Income Tax Assessment Act 1997 section 152-205

Reasons for decision

Unless otherwise stated all legislative references are to the Income Tax Assessment Act 1997 as it existed prior to the passage of the Treasury Laws Amendment (Tax Integrity and Other Measures) Act 2018 which introduced a new set of rules in respect of shares or trust interests for CGT events happening on or after 8 February 2018.

To be eligible for the small business CGT concessions you must satisfy several conditions that are common to all the concessions. These are called the basic conditions. Some of the concessions have additional, specific conditions that also must be satisfied.

In addition, where the relevant CGT assets are shares in a company you must be a CGT concession stakeholder in the company just before the CGT event (subsection 152-10(2)).

CGT concession stakeholder

An individual is a CGT concession stakeholder of a company if they are a significant individual in the company (section 152-60).

Significant individual

An individual is a significant individual in a company at a time if, at that time, the individual has a small business participation percentage (SBPP) in the company of at least 20%. This 20% can be made up of direct and indirect percentages (section 152-55).

SBPP

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 (section 152-65).

An entity's direct SBPP in a company 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 percentages above (section 152-70).

An entity's indirect SBPP in a company 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 (section 152-75).

In your case, you beneficially owned less than 20% of the shares in the company just before the CGT event giving you a SBPP in the company of less than 20%. Therefore, you were not a significant individual or CGT concession stakeholder of the company just before the CGT event.

As such you do not satisfy the additional condition in subsection 152-10(2). You cannot apply the small business CGT concessions to reduce or disregard the capital gain you made on the disposal of your shares in the company.