Edited version of private advice

Authorisation Number: 1052305038046

Date of advice: 22 November 2024

Ruling

Subject: CGT - small business concessions

Question 1

Will Individual satisfy the basic conditions in Sub-Division 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of capital gains made on the sale of their shares in Operating Company to Third Party such that they can access the concessions available under subdivisions 152-C, D and E?

Answer 1

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

Relevant facts and circumstances

OpCo is an incorporated entity conducting a business.

Individual owns, and has owned, all the shares in OpCo for more than a year.

Individual and OpCo are tax residents of Australia.

Individual wishes to sell all their shares in OpCo and retire.

Individual is over 55 years of age.

Negotiations are underway with an unrelated third party (Third Party) to sell the shares in OpCo.

Individual will sell their shares in OpCo directly to Third Party. This sale will result in a capital gain.

Individual intends to apply the CGT Small Business Concessions in respect of the gain arising on the disposal of their shares in OpCo to Third Party.

Other relevant facts

Individual satisfies the maximum net asset value test in section 152-15 of the ITAA 1997.

OpCo satisfies the maximum net asset value test in section 152-15 of the ITAA 1997.

No financial instruments or cash has been acquired by OpCo for a purpose that included assisting OpCo to satisfy paragraph 152-10(2)(a).

OpCo has an annual turnover of over $2,000,000.

The shares in OpCo satisfy the active asset test in section 152-35 of the ITAA 1997.

OpCo has no entities connected with it or affiliates other than Individual for the purposes of section 152-15 of the ITAA 1997.

Reasons for decision

Question 1

Summary

Individual will satisfy the basic conditions in subdivision 152-A in respect of capital gains made on the sale of their shares in Operating Company to Third Party, and will thus be eligible for CGT small business relief under Subdivisions 152-C, D and E.

Detailed reasoning

Basic conditions for small business concessions

To qualify for any of the CGT small business concessions, an entity must satisfy several conditions that are common to all the concessions, known as the basic conditions. The basic conditions are contained in Subdivision 152-A of the ITAA 1997.

Subsection 152-10(1) states:

A *capital gain (except a capital gain from *CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

(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 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 (1A) or (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).

Paragraph 152-10(1)(a)

Individual intends to dispose of their shares in Operating Company to Third Party. As shares are CGT assets as defined in section 108-5, this disposal would otherwise cause CGT event A1 under section 104-10 to occur, which will satisfy paragraph 152-10(1)(a).

Paragraph 152-10(1)(b)

The disposal will otherwise result in a capital gain. Thus, this condition is satisfied.

Paragraph 152-10(1)(c)

Paragraph 152-10(1)(c) states that at least one of the requirements listed at subparagraphs (i) to (iv) must apply. Relevantly, Individual satisfies the maximum net asset value test in section 152-15, thus satisfying the requirement of subparagraph 152-10(1)(c)(ii).

Paragraph 152-10(1)(d)

Paragraph 152-10(1)(d) requires the CGT asset which has been disposed of to satisfy the active asset test in section 152-35, which includes requirements in relation to the period of ownership of the CGT asset and the period the CGT asset has been active.

Active asset test

The active asset test is satisfied 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 test period detailed below, 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 7.5 years during the test period.

The test period:

•                     begins when you acquired the asset, and

•                     ends at the earlier of:

­        the CGT event, and

­        when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

The meaning of an active asset is set out in section 152-40. Where the assets being disposed of are shares in a company, the definition of an active asset is modified, so that even if it was possible for the assets to be active assets as defined in subsection 152-40(1), the exception in subsection 152-40(4) applies and they cannot be active assets unless the requirements of subsection 152-40(3) are met.

Subsection 152-40(3) relevantly provides:

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:

­        the market values of the active assets of the company or trust; and

­        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

­        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.

Individual held all the shares in the Operating Company since 23 January 2020. The shares in OpCo meet the active asset test for the entirety of Individual's ownership period. Thus, paragraph 152-10(1)(d) will be satisfied.

Conclusion

The basic conditions in subsection 152-10(1) will be satisfied in relation to Individual's sales of shares in OpCo.

Additional basic conditions for shares in a company

Subsection 152-10(2) provides additional conditions to be met where the CGT asset is a share in a company. These relevantly include that:

•                     the active asset test would still be satisfied where any financial instruments or cash was acquired by the company for a purpose that included assisting the company to satisfy the active asset test are excluded from being active assets (paragraph 152-10(2)(a))

•                     the company would satisfy the maximum net asset value test of section 152-15 if the following assumptions were made (subparagraph 152-10(2)(c)(ii)):

­        the only CGT assets or annual turnovers considered are those of the company, its affiliates and those entities controlled by the company as described in 328-125

­        each reference in 328-125 to 40% were a reference to 20%

­        you are a CGT concession stakeholder in the company (subparagraph 152-10(2)(d)(i)).

Paragraph 152-10(2)(a)

OpCo has not acquired any financial instruments or cash for a purpose that included meeting the active asset test. Thus, the active asset test will continue to be satisfied and this condition is met.

Subparagraph 152-10(2)(c)

As OpCo has no entities connected with it or affiliates other than Individual for the purposes of section 152-15 and OpCo satisfies the maximum net asset value test as described in section 152-15, it follows that it also satisfies the maximum net asset value test as described in subparagraph 152-10(2)(c)(ii). Thus, this condition is satisfied.

Subparagraph 152-10(2)(d)

Section 152-60 provides that a CGT concession stakeholder in a company includes a significant individual. A significant individual in a company is one that has a small business participation percentage in the company of at least 20% (section 152-55).

Section 152-70 defines an entity's direct small business participation percentage in a company to be the smallest of the following because of holding the legal and equitable interest in shares in the company:

(a)           the percentage of voting power in the company, or

(b)           the percentage of any dividend that the company may pay; or

(c)           the percentage of any distribution of capital the company may make.

Individual owns all shares issued by OpCo, which gives them all the voting rights in OpCo, and entitlement to any dividends or distribution of capital. Thus, Individual's small business participation percentage in OpCo is 100% and they are a significant individual and CGT concession holder of OpCo.

Applying subdivisions 152-C, D and E

Subdivisions 152-C and E may be applied if the basic conditions in Subdivision 152-A are satisfied for the gain. Thus, Individual may choose to apply these concessions. Subdivision 152-D has additional conditions for those under 55 years of age. As Individual is over 55 years of age, they do not have these additional requirements and will be able to apply subdivision 152-D.