Edited version of private advice

Authorisation Number: 1051945216387

Date of advice: 7 February 2022

Ruling

Subject: Small business concessions - disposal of shareholding

Question

Will the CGT Small Business Concessions apply to the disposal of the taxpayer's shares in Company A to a Company B?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Individual taxpayer proposing to dispose of their shareholding in Company A.

Individual is one of three individual shareholder/directors in Company A.

The other two director-shareholders are not associates or affiliates of the individual.

Shareholding in Company A was acquired by the individual on XXXX and XXXX and has a cost base of $XXXX.

The individual holds 33.3% of the shareholding in Company A.

The individual proposes to deposit their shares to a soon to be created wholly owned private company (Company B) for the market value of the shares.

The sole director and shareholder of Company B will be the individual. The purpose of this private company is for investing and acquiring shares.

The proposed transaction is Company B will enter into vendor terms with the individual for $XXXX with the remainder $XXXX to issue as share equity to the individual.

The individual has no other affiliates or associates outside of Company A.

Company A has no connected entities or affiliates.

The relevant financial information for Company A as at XX/XX/XXXX:

The relevant net asset position for the individual as at XX/XX/XXXX:

Company A has seen an increase in their cash compared to their prior trading years as a result of the COVID19 pandemic.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-40

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 152-205

Income Tax Assessment Act 1997 section 152-210

Income Tax Assessment Act 1997 section 152-410

Reasons for decision

Basic conditions

Section 152-10 of the Income tax Assessment Act 1997 (ITAA 1997) contains the basic conditions that must be satisfied to be eligible to apply the CGT small business concessions. These conditions are:

(a) a CGT event happens in relation to a CGT asset in an income year.

(b) the event would (apart from this Division) have resulted in the gain.

(c) at least one of the following applies:

(i)      you are a small business entity for the income year

(ii)     you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

(iii)    you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or

(iv)    you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

To be eligible to apply the small business CGT concessions all four of the basic conditions must be satisfied.

Application to your circumstances

The proposed disposal of your shareholding in Company A constitutes CGT Event A1 under section 104-10 of ITAA 1997.

The proposed disposal will result in a gain.

You are not a CGT small business entity, and you do not operate as a partner as a partnership.

If you are able to satisfy the maximum net asset value test and the active asset test you will satisfy the initial basic conditions.

Maximum net asset value test

You will satisfy the maximum net asset value test under section 152-15 of ITAA 1997 if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000:

•         the net value of the CGT asset of yours;

•         the net value of the CGT assets of any entities connected with you;

•         the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates.

Application to your circumstances

The net value of your CGT assets for the purposes of this section is $0. This is based on the below treatment:

The net value of the CGT assets of Company A are outlined below:

As you have no other affiliates or entities connected with you, your net asset value under section 152-15 of ITAA 1997 is $XXXX. As this amount does not exceed $6,000,000 you satisfy the maximum net asset value test.

Active Asset text

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if:

•         you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period of ownership, or

•         you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 and a half years.

In your case, you acquired the shares on XXXX and XXXX. Accordingly, you have held the shareholding for less than 15 years.

Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business.

Under subsection 152-40 (3) a CGT asset is also an active asset at a given time if, at that time, you own it and:

•         it is either a share in a company that is an Australian resident at that time or an interest in a trust that is a resident trust for CGT purposes for the income year in which that time occurs; and

•         the total of:

(i)      the *market values of the active assets of the company or trust; and

(ii)     the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; and

(iii)    any cash of the company or trust that is inherently connected with such a business;

•         is 80% or more of the market value of all of the assets of the company or trust.

Application to your circumstances

The relevant amounts of Company A are listed below:

•         Market values of the active assets of the company or trust: $XXXX

•         The total of the market value of any financial instruments of the company or trust that are inherently connected with a business that the company carries on: $XXXX.

•         Total of any cash of the company that is inherently connected with such a business: $XXXX.

The total of the company's active assets, financial instruments and cash is $XXXX. The market value of all assets of the company or trust is $XXXX. Accordingly, the active assets of the market value of the company represent 100% of the market value of all assets of the company, and the active asset test is satisfied.

Additional basic conditions

As the CGT asset relates to a share in a company, the following additional basic conditions must be met under subsection 152-10 (2) of ITAA 1997:

(a)  the CGT asset would still satisfy the active asset test if the assumptions in subsection (2A) were made;

(b)  if you do not satisfy the maximum net asset value test (see section 152-15)-you are carrying on a business just before the CGT event;

(c)   either:

(i)            the object entity would be a *CGT small business entity for the income year; or

(ii)           the object entity would satisfy the maximum net asset value test (see section 152-15);

if the following assumptions were made:

(iii)          the only CGT assets or *annual turnovers considered were those of the object entity, each affiliate of the object entity, and each entity controlled by the object entity in a way described in section 328-125;

(iv)          each reference in section 328-125 to 40% were a reference to 20%;

(v)           no determination under subsection 328-125(6) were in force;

(d)  just before the CGT event, either:

(i)            you are a *CGT concession stakeholder in the object entity; or

(ii)           CGT concession stakeholders in the object entity together have a *small business participation percentage in you of at least 90%.

Application to your circumstances

The assumptions in subsection (2A) include that the assets of a company or trust for the purposes of the active asset test is not covered by the provisions allowing for financial instruments or cash if the company or trust acquired that asset for a purpose that included assisting an entity to otherwise satisfy the active asset test.

You have advised that Company A has held cash reserves of $XX as at 30 June 20XX and $XX as at 30 June 20XX. It is accepted that the cash of the business has significantly increased in the last two years as a result of the COVID19 pandemic. It is accepted that the object entity did not acquire cash for the purpose of assisting the entity to otherwise satisfy the active asset test.

Accordingly, the active asset test for Company A remains satisfied as outlined above.

You do satisfy the maximum net asset value test as outlined above.

The object entity will not meet the definition of a CGT small business entity for the income year as you have advised the turnover for Company A will exceed $X million.

You have advised that the object entity, being Company A does not control any other entities or have any affiliates. It is accepted that directors of a company are not automatically affiliates of the company per subsection 328-130 (2) of ITAA 1997.

Based on this, the net asset value test of the object entity remains the same as outlined above, with the net asset value of Company A being $XXXX. As this amount does not exceed $6,000,000 the object entity satisfies the maximum net asset value test.

You are a CGT concession stakeholder in the object entity just before the CGT event. A significant individual in a company is a CGT concession stakeholder under subsection 152-60 (a) of ITAA 1997. A significant individual in a company is an individual with a small business participation percentage in the company of at least 20% under section 152-55 of ITAA 1997.

As you hold 33.3% of all shareholdings in Company A, this represents a direct small business participation percentage in excess of the 20% required, and you are accordingly a significant individual and CGT concession stakeholder.

You meet all the basic conditions for relief under subdivision 152-A of ITAA 1997.

Small business 50% reduction

As you meet the basic conditions for relief outlined under subdivision 152-A of ITAA 1997 the small business 50% reduction under subdivision 152-C of ITAA 1997 is available to you.

Small business rollover

You can obtain the rollover under subdivision 152-E of ITAA 1997 as the basic conditions for relief under subdivision 152-A have been satisfied for the gain.