Edited version of private advice

Authorisation Number: 1052203808466

Date of advice: 18 December 2023

Ruling

Subject: CGT - small business concessions

Question

Does the Trustee satisfy the basic conditions for small business relief in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the disposal of its shares in the Company?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

1.    The Company, is an Australian resident company, that was incorporated in 20XX.

2.    Individual A is the sole director of the Company.

3.    The Company carries on a financial planning business.

4.    At no time, during the period from 1 July 2012 to 30 June 2022, has the sum of the market value of the Company's active assets, and any financial instruments and cash inherently connected with its business, been less than 80% of the market value of all the Company's assets.

5.    The shares in the Company have always been held by the Trustee as trustee for the Trust.

6.    The Trust is a discretionary trust and for the income years ended 30 June 2021 to 30 June 2023, the Trustee has distributed 50% of its net income to Individual A and 50% to Individual B.

7.    The Trustee also owns 50% of the units in a Unit Trust and, in accordance with its unit holdings, received a 50% share of the Unit Trust's profits in respect of the income year ended 30 June 2022.

8.    During the income year ended 30 June 2023, the Trustee transferred its shares in the Company to the Purchaser.

9.    Just before the transfer of shares, the sum of the net value of the CGT assets of the Trustee and entities connected with the Trustee (the Company, the Unit Trust and Individuals A and B), collectively and individually, did not exceed $6,000,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subsection 152-10(1)

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 Subdivision 118-B

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

Summary

1.    The Trustee satisfies the basic conditions for small business relief in section 152-10 in respect of the disposal of its shares in the Company.

Detailed reasoning

2.    The basic conditions for relief under the small business CGT concessions are outlined in subsection 152-10(1). These conditions 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 the gain;

(c)   at least one of the following applies:

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

(ii)           you satisfy the maximum net asset value (MNAV) test (see section 152-15);

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

(iv)          the conditions mentioned in subsection 152-10(1A) or 152-10(1B) are satisfied in relation to the CGT asset in the income year;

(d)     the CGT asset satisfies the active asset test (see section 152-35).

3.    Consideration of each of these requirements in the current circumstances is examined below.

Basic condition (a) of subsection 152-10(1) - A CGT event happens in relation to a CGT asset of yours in an income year

4.    A CGT asset is defined in subsection 108-5(1) as any kind of property or a legal or equitable right that is not property. Note 1 to section 108-5 provides some examples of CGT assets which include 'shares in a company'.

5.    The shares in the Company are clearly property and, therefore, a CGT asset as defined by section 108-5.

6.    Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law.

7.    The Trustee disposed of its shares in the Company to the Purchaser and, therefore, pursuant to subsection 104-10(1), CGT event A1 happened.

8.    Consequently, the requirements of paragraph 152-10(1)(a) are satisfied.

Basic condition (b) of subsection 152-10(1) - The event would have resulted in the gain

9.    The Applicant has advised that the Trustee is expected to make a capital gain from the disposal of the shares in the Company.

10.  Consequently, the requirements of paragraph 152-10(1)(b) are satisfied.

Basic condition (c) of subsection 152-10(1) - at least one of the tests in paragraph 152-10(1)(c) applies.

11.  Paragraph 152-10(1)(c) requires that at least one of the requirements in subparagraphs 152-10(1)(c)(i) to 152-10(1)(c)(iv) applies. One of these requirements, in subparagraph 152-10(1)(c)(ii), is that you satisfy the MNAV test.

12.  Section 152-15 outlines the requirements to satisfy the MNAV test. It provides that, you satisfy the MNAV 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 assets of yours;

(b)  The net value of the CGT assets of any entities *connected with you;

(c)   The net value of the CGT assets of any *affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).

13.  The 'net value of the CGT assets' of an entity is defined in subsection 152-20(1) as the amount (whether positive, negative or nil) obtained by subtracting from the sum of the *market values of those assets the sum of:

(a) the liabilities of the entity that are related to the assets; and

(b) the following provisions made by the entity:

(i) provisions for annual leave;

(ii) provisions for long service leave;

(iii) provisions for unearned income;

(iv) provisions for tax liabilities.

14.  Subsection 152-20(2) also provides that the following assets are disregarded when working out the net value of the CGT assets of an entity:

(a) *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; and

(b) if the entity is an individual:

(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); and

(ii) except for an amount included under subsection (2A), 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); and

(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; and

(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.

15.  Based on the information provided by the Applicant, it is considered that the Trustee satisfies the MNAV test because, just before the CGT event, the sum of the net value of the CGT assets of the Trustee and entities connected with the Trustee did not exceed $6,000,000.

16.  Because the Trustee satisfies the MNAV test in subparagraph 152-10(1)(c)(ii) it, therefore, meets the requirements of paragraph 152-10(1)(c) as only one of the tests in that paragraph is required to be met.

Basic condition (d) of subsection 152-10(1) - the CGT asset satisfies the active asset test

Active asset test

17.  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)).

18.  Subsection 152-35(2) provides that the test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases.

19.  In the current circumstances, the Trustee acquired the shares in the Company in 20XX and disposed of these shares in 2023 (when CGT event A1 happened). Accordingly, the shares were owned for more than 15 years and, therefore, the shares must be an active asset for at least 7 ½ years during this period.

Meaning of active asset

20.  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).

21.  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 the assets of the company or trust (subsection 152-40(3)).

22.  The Company is an Australian resident and, at no time during the period 1 July 2012 to 30 June 2022, has the sum of the market value of the Company's active assets, and any financial instruments and cash inherently connected with its business, been less than 80% of the market value of all the Company's assets.

23.  Accordingly, it is considered that shares held by the Trustee in the Company were active assets for more than 7 ½ years and, therefore, the Trustee satisfies the active asset test and paragraph 152-10(1)(d).

Additional basic conditions for shares in a company or interests in a trust

24.  Subsection 152-10(2) sets-out additional basic conditions that must be satisfied if the CGT asset is a share in a company, or an interest in a trust, (the object entity).

25.  These conditions must be satisfied, in the current circumstances, because the Trustee has disposed of its shares in the Company and apply as follows:

Additional basic condition (a) of subsection 152-10(2) - the CGT asset would still satisfy the active asset test if the assumptions in subsection 152-10(2A) were made

26.  Subsection 152-10(2A) provides that, for the purposes of paragraph 152-10(2)(a), in working out whether subsection 152-40(3) 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) (about financial instruments), nor

(ii) subparagraph 152-40(3)(b)(iii) (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 this section, and

(b)  paragraph 152-40(3)(b) 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) also covers each asset that:

(i) is held at the test time by a later entity covered by subsection 152-10(2B), and

(ii) is, for that later entity, an asset of a kind referred to in subparagraph 152-40(3)(b)(i), (ii) or (iii), 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), 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.

27.  In this case, the shares in the Company would still satisfy the active asset test if the assumptions in subsection 152-10(2A) were made and, therefore, the requirements of paragraph 152-10(2)(a) are met.

Additional basic condition (b) of subsection 152-10(2) - if you do not satisfy the MNAV test - you are carrying on a business just before the CGT event

28.  The Trustee satisfies the MNAV test in the current circumstances and, therefore, this requirement does not apply.

Additional basic condition (c) of subsection 152-10(2) - either:

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

(ii) the object entity would satisfy the MNAV 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;

(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;

29.  The net value of the Company's assets, just before the CGT event, was less than $6,000,000 and, as such, it would satisfy the MNAV test.

30.  It is noted that no other entity's assets would be included in this calculation as a result of the assumptions in subparagraphs 152-10(2)(c)(iii), (iv) and (v) because the Company does not have any affiliates nor does it directly control other entities.

31.  As a result, the requirements in paragraph 152-10(2)(c) are met.

Additional basic condition (d) of subsection 152-10(2) - 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%.

CGT concession stakeholder

32.  An individual is a CGT concession stakeholder of a company if they are:

(a)  a significant individual in the company; or

(b)  a spouse of a significant individual in the company, if the spouse has a small business participation percentage in the company at that time that is greater than zero (section 152-60).

Significant individual

33.  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).

Small business participation percentage

34.  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).

35.  An entity's direct small business participation percentage in a company is the smallest percentage out of:

(a)   voting power that the entity is entitled to exercise;

(b)   any dividend payment that the entity is entitled to receive;

(c)   any capital distribution that the entity is entitled to receive (section 152-70).

36.  An entity's direct small business participation percentage in a discretionary trust (i.e., a trust where entities do not have entitlements to all the income and capital of the trust, and the trust makes a distribution of income or capital) is the lower percentage of either distributions of:

•         income that the entity is beneficially entitled to during the income year; or

•         capital that the entity is beneficially entitled to during the income year.

37.  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).

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

38.  The Trustee is not a significant individual or CGT concession stakeholder in the Company because it holds its shares in its capacity as trustee (and not as an individual). Accordingly, the requirements in subparagraph 152-10(2)(d)(i) are not met.

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

39.  The Trustee distributed 50% of its income for the income year ended 30 June 2023 to Individual A and 50% to Individual B.

40.  Accordingly, both Individual A and Individual B will be significant individuals and CGT concession stakeholders in the Company just before the CGT event (as they each indirectly hold a 50% small business participation percentage in the Company).

41.  In addition, together Individual A and Individual B, who are CGT concession stakeholders in the Company, have a small business participation percentage in the Trust of 100%.

42.  As a consequence, the requirements in subparagraph 152-10(2)(d)(ii) are met.

Conclusion

43.  Based on the above analysis, the Trustee satisfies the basic conditions for small business relief in section 152-10 in respect of the disposal of its shares in the Company.