Private ruling: Subject CGT – SB concessions – 15-year exemption
Date of advice: 24 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you and your spouse entitled to disregard a capital gain arising from the sale of the shares held in the company under the 15-year exemption in section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Are the contractual rights under the agreements active assets for the purposes of determining whether the shares held in the company satisfy the active asset test? | A2: Yes | Q3: Will the capital gains tax event happen in connection with you and your spouse’s retirement? | A3: Yes

Relevant facts and circumstances: A trust was created in the early 1980s. The Trust carried on the business of providing consultancy services in the resources industry until the mid-1990s. The company was established in the early 1980s. The company is an Australian resident. You and your spouse each held a number of ordinary shares in the company. You and your spouse are directors of the company. The company acted as Trustee of the Trust until the company was removed in the mid-1990s. The company carried on the consultancy business in the resources industry for more than 7.5 years when the consultancy business assets were transferred to another entity. The company entered into a number of agreements with resource companies over a number of years. The company was entitled to royalty payments. The company received income from providing consultancy services. You continually administered and managed the company’s rights and obligations under the agreements. You and your spouse are over 55 year old. You and your spouse are considering selling your shares in the company to a third party within the next few years. The sale of the shares in the relevant income year will result in you and your spouse each incurring a capital gain. CGT Event K6 will apply to the sale of the shares. Following the sale of your shares in the company you will retire and cease to receive director's fees. Your spouse was in full time employment and has gradually reduced their working hours over the years. Your spouse as a director of the company carry’s out their director duties. Your spouse spends several hours per week undertaking these duties. Following the sale of your spouse’s shares in the company your spouse will retire. You and your spouse and their connected entities (which include the company) will satisfy the maximum net asset value test just before the CGT event. The market value of the contractual rights under the resource together with the other assets of the company which are active assets represented at least XX% of the market value of all the assets of the company for at least 7 and a half years in the time that you and your spouse have owned their shares. You and your spouse will each be a CGT concession stakeholder of the company as each held YY% of the shares in the company just before the CGT event. The company will have a significant individual for at least 15 years during you and your spouse’s period of ownership of the company shares.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 152-105 | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 subsection 152-10(1A) | Income Tax Assessment Act 1997 s ubsection 152-10(1B) | Income Tax Assessment Act 1997 subsection 152-10(2) | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 paragraph 152-35(1)(a) | Income Tax Assessment Act 1997 paragraph 152-35(1)(b) | Income Tax Assessment Act 1997 subparagraph 152-40(1)(a)(ii) | Income Tax Assessment Act 1997 subparagraph 152-40(1)(a)(iii) | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 subsection 152-40(3) | Income Tax Assessment Act 1997 subsection 152-40(4) | Income Tax Assessment Act 1997 subparagraph 152-40(4)(e)(ii) | Income Tax Assessment Act 1997 section 152-50 | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-60

Reasons for decision: Summary: 15-year exemption You will have a capital gains tax (CGT) event if you sell or give away a 'CGT asset’. A share in a company is an example of a CGT asset. Under the CGT small business 15-year exemption in section 152-105 of the ITAA 1997, you can disregard any capital gain arising from the disposal of a CGT asset if: (1) you satisfy the basic conditions for the small business CGT concessions in Subdivision 152-A of the ITAA 1997, (2) you continuously owned the CGT asset for the 15-year period ending just before the CGT event, (3) if the CGT asset is a share in a company or an interest in a trust, the company or trust had a significant individual for a total of at least 15 years during which you owned the CGT asset and (4) you are at least 55 years old at the time of the CGT event and the event happens in connection with your retirement, or are permanently incapacitated at that time. Condition (1) Section 152-10 of the ITAA 1997 outlines the basic conditions: (a) the CGT event happens in relation to a CGT asset of yours in an income year (b) the event would have resulted in the 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 (see section 152-15) iii. you are a partner in a partnership that is a 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) As the CGT assets are shares in a company the additional basic condition set out in subsection 152-10(2) of the ITAA 1997 must also be satisfied just before the CGT event. This condition requires you to be a CGT concession stakeholder in the company. In this case, CGT event A1 under section 104-10 of the ITAA 1997 will happen when the shares in the company are sold. It is expected that the sale of shares will result in a capital gain. You and your spouse will satisfy the maximum net asset value test just before the event. Further, the Commissioner accepts that the agreements used to derive business income are inherently connected to the company’s business activities and are active assets of the company. Accordingly, the company has active assets with a market value of at least XX% of the market value of all its assets. Additional basic condition You and your spouse will be a CGT concession stakeholder of the company as each held YY% of the shares in the company just before the CGT event. In this case, all of the basic conditions will be satisfied which means condition (1) for the small business 15-year exemption has been met. Condition (2 ) You and your spouse will have continuously owned the shares in the company for the 15-year period ending just before the CGT event, and this condition will be satisfied. Condition (3) You and your spouse have each held YY% of the shares in the company since the early 1980s. Therefore you and your spouse were both significant individuals of the company since that time, that is, for at least 15 years. Condition (4) Whether a CGT event happens in connection with an individual’s retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce. In this case, based on the information provided you and your spouse will be over 55 years of age at the time of the CGT event occurs and will be retiring from all work. Accordingly, the CGT event is considered to have happened in connection with you and your spouse’s retirement. | Detailed Reasoning - Conclusion: You and your spouse have satisfied all of the conditions in relation to the 15-year exemption and can disregard any capital gain made on the disposal of the shares.