Edited version of private advice

Authorisation Number: 1052109851110

Date of advice: 26 April 2023

Ruling

Subject: Small business exemption - exempt payments to shareholders

Question

Will the payments from Coy A to you, directly and indirectly via the trust, be treated as non-assessable non-exempt income pursuant to subsection 152-125(3) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.             Coy A was incorporated on XX/XX/20XX.

2.             The current shareholders of Coy A are:

(a)          Person A who directly owns 50% of the shares, and

(b)          yourself who directly owns X% and indirectly X% through a trust.

3.             The trust was created by a Will and you are entitled to 100% of the income of the trust.

4.             Person A and the trust both hold more than 40% of the ordinary shares in Coy A respectively. Thus, they are both 'connected entities' with Coy A.

5.             Coy A does not have any affiliates.

6.             There are no other entities that are controlled by either Person A, you or the trust.

7.             Neither Person A, you nor the trust carry on a business.

8.             Coy A owns 2 properties:

(a)          Property A was purchased on XX/XX19XX, and

(b)          Property B used solely for residential rent.

9.             You and Person A are over 55 years of age, and desire to retire. It is intended for Coy A to:

(a)          sell Property A within the next 24 months

(b)          sell Property B within the next 24 months

(c)           be wound up, with a liquidator being appointed within the next 24 months.

10.          Coy A previously obtained 2 private rulings, where the following was decided:

(a)          the first ruling decided Property A is a pre-CGT asset, and

(b)          the second ruling for the 20XX-20XX and 20XX-20XX income years decided:

                                  i.            Property A satisfied the active asset test

                             ii.        Coy A satisfied the conditions to claim the small business 15 year exemption relating to the sale of Property A

                            iii.        both you and Person A are CGT concession stakeholders of Coy A, as both of you were significant individuals of Coy A at the relevant time

                           iv.        the payments from Coy A to the CGT concession stakeholders relating to the sale of Property A is considered to be payments of an Exempt Amount under subparagraph

                             v.        152-125(1)(a)(iii).

11.          As Property A has not yet been sold by Coy A, it is seeking to extend the period of the ruling previously obtained to 20XX-20XX and 20XX-20XX income years.

12.          The shareholdings in Coy A have not changed since the ruling issued on XX/XX/20XX, therefore both you and Person A are still classified as significant individuals and CGT Concession Stakeholders of Coy A.

13.          Coy A will make the payments of the sale proceeds to its shareholders in accordance with their shareholdings within 2 years from the CGT event for the sale of Property A. In particular, the following payments of the Exempt Amount will be made to you and Person A (directly and via the trust) as follows:

(a)          50% to Person A

(b)          X% to you (directly), and

(c)           XX% to the trustees of the trust who will distribute 100% of the income of the trust to you in the relevant income year.

Information provided

14.          The information provided was obtained from the private ruling application received on XX/XX20XX.

Assumptions

1.             The trust is a fixed trust as the terms of the Will does not provide the trustees with the discretion to distribute income and capital flexibly. The terms of the Will provide Person A with a right to receive 100% of any distribution of income by the trust during her lifetime.

2.             Coy A's annual turnover will be less than $2 million for the 20XX-20XX and 20XX-20XX income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(3)

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 152-125

Income Tax Assessment Act 1997 subsection 152-125(1)

Income Tax Assessment Act 1997 subparagraph 152-125(1)(a)(iii)

Income Tax Assessment Act 1997 subsection 152-125(2)

Income Tax Assessment Act 1997 subsection 152-125(3)

Income Tax Assessment Act 1997 paragraph 152-125(3)(a)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question

Will the payments from Coy A to you be treated as non-assessable non-exempt income pursuant to subsection 152-125(3)?

Summary

The payments from Coy A to you will be treated as non-assessable non-exempt income by operation of subsection 152-125(3).

Detailed reasoning

Distributions of the exempt amount

1.             Subsection 152-125(1) provides that, if a capital gain made by a company is disregarded under the small business 15-year exemption, any distribution made by the company of that exempt amount to a CGT concession stakeholder is not included in the assessable income of the CGT concession stakeholder, and not deductible to the company, if the following conditions are satisfied:

(a)          the company makes a payment within 2 years after the CGT event that resulted in the capital gain or, in appropriate circumstances, such further time is allowed by the Commissioner

(b)          the payment is made to an individual who was a CGT concession stakeholder of the company just before the CGT event, and

(c)           the total payments made to each CGT concession stakeholder does not exceed an amount determined by multiplying the CGT concession stakeholders control percentage by the exempt amount

2.             In determining the taxable income of the company, the trust, individual or any of the interposed entities, disregard the total amount of the payment made to the CGT concession stakeholder up to the following limit, determined as follows:[1]

Stakeholder's participation percentage x exempt amount

3.             Subsection 152-125(3) states:

If a company makes such a payment, this Act applies to the payment, to the extent that it is less than or equal to the limit mentioned in subsection (2), as if:

(a)          it were not a *dividend, and

(b)          it were not a *frankable distribution.

Disposal of property - time of CGT event A1

4.             CGT event A1 happens if you dispose of a CGT asset.[2] The event happens when you enter into the contract for disposal, or if there is no contract when the change of ownership occurs.[3]

5.             Coy A proposes to sell Property A within the next 24 months. A sale contract is intended to be entered into. CGT event A1 will happen when you enter into the sale contract. Coy A will make a capital gain in the income year the sale contract is entered into.

Application to your circumstances

6.             It has already been established in the previous 2 private rulings issued to Coy A that:

(a)          Coy A will satisfy the basic conditions in subsection 152-10(1)

(b)          the capital gain made by Coy A relating to the sale of Property A will be disregarded under the small business 15-year exemption, and

(c)           the amount of the capital gain made from the sale of Property A is taken to be an exempt amount under section 152-125.

7.             The small business participation percentage of yours in Coy A is 50%, as it includes your direct and indirect small business participation percentage in Coy A.[4] As you have at least a small business participation percentage of 20% in Coy A, you are a significant individual of Coy A,[5] Consequently, you are also a CGT concession stakeholder of Coy A.[6]

8.             Coy A maintains that it will make the payments of the exempt amount to you within 2 years after Property A has been sold.

9.             Coy A has advised that it will pay you 50% of the exempt amount as a dividend.

10.          Paragraph 152-125(3)(a) specifically includes a dividend in the exempt amount if the amount paid does not exceed the amount calculated under subsection 152-125(2) to determine the CGT stakeholders exempt amount.

11.          As a CGT concession stakeholder, you are entitled to receive 50% of the exempt amount when the calculation in subsection 152-125(2) is applied to the amount.

12.          Coy A has advised it will pay you 50% of the exempt amount and that the payment will not exceed the CGT stakeholders exempt amount.

13.          The payment made to you will be treated as non-assessable non-exempt income under subsection 152-125(3).

[1] Subsection 152-125(3).

[2] Subsection 104-10(1).

[3] Subsection 104-10(3).

[4] Sections 152-65, 152-70 and 152-75

[5] Section 152-55

[6] Section 152-60