Edited version of private advice

Authorisation Number: 1052198618847

Date of advice: 29 November 2023

Ruling

Subject: CGT - small business concessions

Question

Does the trust satisfy the basic conditions for the small business capital gains tax (CGT) relief in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for the sale of the shares held in the object entity?

Answer

Yes. The basic conditions contained in subsection 152-10(1) of the ITAA 1997 were satisfied because:

•         CGT event A1 happened when the trust disposed of the shares in the object entity

• The trust made a capital gain from the disposal
• The trust 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

The trust 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 the trust does 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 the object entity itself
• The trust satisfies the maximum net asset value test
• the object entity would satisfy the maximum net asset value test if the assumptions in paragraph 152-10(2)(c) of the ITAA 1997 were made, because:
  • there are no other entitles connected with the object entity, nor does the object entity have any affiliates, and
  • the combined net value of the CGT assets owned by the object entity do not exceed $6,000,000
• just before the CGT event, CGT concession stakeholders in the object entity together had a small business participation percentage in the trust of at least 90%, because:
  • Person A had a direct small business participation percentage in the trust of 100% due to the distribution of 100% of trust income in the 20XX income year.
  • Person A had an indirect small business participation percentage in the object entity of XX% (at least 20%), and as such is a significant individual in the object entity, which in turn makes them CGT concession stakeholders in TPL.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The trust is a discretionary investment trust. The trustees of the trust are Person A and Person B. The beneficiaries are Person A and Person B. The trust owns ordinary shares in the object entity.

The object entity provides consulting and advisory services. Person B was one of 3 directors of the object entity.

The object entity has no affiliates or connected entities. The object entity does not hold shares in any other entities.

The object entity's assets include bank accounts, cash on hand, deposits held, motor vehicles, office equipment and leasehold improvements. The object entity's liabilities include trade creditors, GST, PAYGW, superannuation, bank loans, vehicle finance loans, and deferred revenue.

Net assets of the object entity are less than $Xm.

In 20XX the shares held in the object entity were sold.

The trust satisfies the maximum net asset value test of less than $6m just before the CGT event.

In 20XX the trust distributed all profits to Person A.

No financial instruments or cash were obtained for a purpose that included assisting the trust to satisfy the active asset test.

The shares satisfied the 80% test during the ownership period, in that the market value of the company active assets and financial instruments and cash (those that are inherently connected with the business) were at least 80% of the market value of all of the company assets.

Just before the CGT event, the CGT concession stakeholders in the object entity together had a small business participation percentage in the trust of at least 90% because Person A has a direct small business participation percentage in the trust of 100% due to the distribution made in 20XX of 100% of trust income. Person A also has an indirect small business participation percentage in the object entity of XX% which makes them a significant individual in the object entity. Person A is a CGT concession stakeholder in the object entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A