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Edited version of private advice
Authorisation Number: 1052038915652
Date of advice: 29 September 2022
Ruling
Subject: Small business concession - basic conditions - additional basic conditions for shares in a company
Question
Did you satisfy the basic conditions (including the additional basic conditions) for small business capital gains tax relief in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the sale of your shares in Company Y?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2022
The scheme commenced on:
1 July 2021
Relevant facts and circumstances
You are an Australian resident individual.
Company Y, an Australian resident company, carries on a business in Australia.
You acquired X shares in Company Y some time ago.
You (and others) executed a share purchase agreement (SPA) under which you disposed of your X ordinary shares in Company Y (Transaction).
You received cash consideration for your shares and you made a capital gain from the disposal. You may also receive an earnout amount (Earnout Amount) if certain milestones are met.
Immediately prior to the Transaction:
• the share structure of Company Y comprised of XX ordinary shares (all with equal voting, capital and dividend rights) and XX E class shares (with only capital rights)
• the officeholders of Company Y were:
- you and Individual A were the directors, and
- you were the sole secretary.
• the main assets of Company Y were:
- a commercial property used by Company Y and Company Z in their respective businesses since acquisition
- intellectual property, and
- XX ordinary shares (50%) in Company Z
Company Z, an Australian resident company, carries on a business.
Immediately prior to the Transaction the share structure of Company Z comprised of XX ordinary shares all with equal voting, capital and dividend rights with the remaining XX ordinary shares (50%) being held by Trust F. You are not a beneficiary of Trust F.
No entities are connected with you and you do not have any affiliates.
The net value of the capital gains tax (CGT) assets of yours, any entities connected with you, your affiliates or entities connected with your affiliates did not exceed $6million just before the Transaction.
The net value of the CGT assets of Company Y, any entities connected with Company Y, its affiliates or entities connected with its affiliates did not exceed $6million just before the Transaction.
No financial instruments or cash were obtained for a purpose that included assisting an entity to satisfy the active asset test.
You made a capital gain from the disposal of your shares in Company Y.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152
Income Tax Assessment Act 1997Subdivision 152-A
Income Tax Assessment Act 1997 section 152-10
Income Tax Assessment Act 1997 subsection 152-10(1)
Income Tax Assessment Act 1997 subsection 152-10(2)
Income Tax Assessment Act 1997subsection 152-10(2A)
Reasons for decision
Basic conditions for relief
Subdivision 152-A of the ITAA 1997 contains the basic conditions that must be satisfied for small business CGT relief. The basic conditions, as set out in subsection 152-10(1) of the ITAA 1997 are:
(a) a CGT event happens in relation to a CGT asset of yours in an income year
(b) the event would (apart from this Division) have resulted in a 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
(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.
Additional basic conditions for shares in a company or interests in a trust
Subsection 152-10(2) of the ITAA 1997 provides that the following additional basic conditions must be satisfied if the CGT asset is a share in a company, or an interest in a trust, (the object entity):
(a) the CGT asset would still satisfy the active asset test if the assumptions in subsection 152-10(2A) of the ITAA 1997 were made
(b) if you do not satisfy the maximum net asset value test - 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
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 of the ITAA 1997
(iv) each reference in section 328-125 of the ITAA 1997 to 40% were a reference to 20%
(v) no determination under subsection 328-125(6) of the ITAA 1997 were in force
(a) 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%.
Subsection 152-10(2A) of the ITAA 1997 provides that, for the purposes of paragraph 152-10(2)(a) of the ITAA 1997, in working out whether subsection 152-40(3) of the ITAA 1997 applies at a given time (the test time) assume that:
(a) an asset of a company or trust is covered by neither:
(i) subparagraph 152-40(3)(b)(ii) of the ITAA 1997 (about financial instruments), nor
(ii) subparagraph 152-40(3)(b)(iii) of the ITAA 1997 (about cash)
if the company or trust acquired that asset for a purpose that included assisting an entity to otherwise satisfy paragraph 152-10(2)(a) of the ITAA 1997 of this section, and
(b) paragraph 152-40(3)(b) of the ITAA 1997 does not cover an asset that:
(i) is a share in a company, or an interest in a trust, (the later entity), and
(ii) is held at the test time by the object entity directly or indirectly (through one or more interposed entities), and
(c) subparagraph 152-40(3)(b)(i) of the ITAA 1997 also covers each asset that:
(i) is held at the test time by a later entity covered by subsection 152-10(2B) of the ITAA 1997, and
(ii) is, for that later entity, an asset of a kind referred to in subparagraph 152-40(3)(b)(i), (ii) or (iii) of the ITAA 1997, as modified by paragraphs (a) and (b) of this subsection, and
(d) subject to paragraph (b) of this subsection, all of the assets of the object entity at the test time included all of the assets of each later entity at the test time, and
(e) for the purposes of paragraph 152-40(3)(b) of the ITAA 1997, the market value at the test time of an asset held by a later entity were the product of:
(i) the asset's market value, apart from this paragraph, at the test time, and
(ii) the object entity's small business participation percentage in the later entity at the test time.
Maximum net asset value test
You satisfy the maximum net asset value test if, just before the CGT event, the sum of the following amounts does not exceed $6,000,000:
(a) the net value of the CGT asset of yours
(b) the net value of the CGT assets of any entities connected with you, and
(c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (section 152-15 of the ITAA 1997).
In working out the net value of the CGT assets of an entity:
(b) disregard shares, units or other interests (except debt) in another entity that is connected with the first-mentioned entity or with an affiliate of the first-mentioned entity, but include any liabilities related to any such shares, units or interests
(c) if the entity is an individual, disregard:
(i) assets being used solely for the personal use and enjoyment of the individual, or the individual's affiliate (except a dwelling, or an ownership interest in a dwelling, that is the individual's main residence, including any adjacent land to which the main residence exemption can extend because of section 118-120 of the ITAA 1997)
(ii) except for an amount included under subsection 152-20(2A) of the ITAA 1997, the market value of a dwelling, or an ownership interest in a dwelling, that is the individual's main residence (including any relevant adjacent land)
(iii) a right to, or to any part of, any allowance, annuity or capital amount payable out of a superannuation fund or an approved deposit fund
(iv) a right to, or to any part of, an asset of a superannuation fund or of an approved deposit fund, and
(v) a policy of insurance on the life of an individual (paragraph 152-20(2)(a) of the ITAA 1997.
Active asset test
A CGT asset satisfies the active asset test if:
(a) 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 test period, or
(b) 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 ½ years during the test period (subsection 152-35(1) of the ITAA 1997).
The test period begins when you acquired the asset and ends at the time of the CGT event (subsection 152-35(2) of the ITAA 1997).
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 (section 152-40 of the ITAA 1997).
A CGT asset is also an active asset at a given time if, at that time, you own it and:
(a) 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
(b) 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 (subsection 152-40(3) of the ITAA 1997).
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 of the ITAA 1997).
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 in the company of at least 20% (section 152-55 of the ITAA 1997).
Small business participation percentage
An entity's small business participation percentage in another entity at a time is the percentage that is the sum of:
• the entity's direct small business participation percentage in the other entity at that time, and
• the entity's indirect small business participation percentage in the other entity at that time (section 152-65 of the ITAA 1997).
An entity's direct small business participation percentage 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 of the ITAA 1997).
An entity's indirect small business participation percentage 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 of the ITAA 1997).
Application to your circumstances
In your case, the basic conditions contained in subsection 152-10(1) of the ITAA 1997 were satisfied because:
• CGT event A1 happened when you disposed of your shares in Company Y
• you made a capital gain from the disposal
• you satisfied the maximum net asset value test just before the CGT event, and
• the shares satisfied the extended definition of an active asset in subsection 152-40(3) of the ITAA 1997 for at least half the period you owned them.
You also satisfied the additional basic conditions set out in subsection 152-10(2) of the ITAA 1997 because:
• the shares would have still satisfied the active asset test if the assumptions in section 152-10(2A) of the ITAA 1997 were made, because:
- no financial instruments or cash were obtained for a purpose that included assisting an entity to satisfy the active asset test
- as you do not control any other entities and there are no 'later entities' as defined in subsection 152-10(2A)(b) of the ITAA 1997, the only assets included in the modified active asset are the assets of Company Y itself and Company Z
• you satisfied the maximum net asset value test
• the object entity (Company Y) would satisfy the maximum net asset value test if the assumptions in paragraph 152-10(2)(c) of the ITAA 1997 were made, because:
- Company Y is a 50% shareholder in Company Z and is therefore connected with Company Z
- there are no other entitles connected with Company Z, nor does Company Z have any affiliates, and
- the combined net value of the CGT assets owned by Company Z and Company Y does not exceed $6million, and
• just before the CGT event, you were a CGT concession stakeholder in Company Y as you had a small business participation percentage in the company of at least 20%.