Private ruling: CGT Event K6
Date of advice: 24 June 2019
Published: August 2019
Ruling period: Year ended 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Is CGT event K6 in section 104-230 of the Income Tax Assessment Act 1997 (ITAA 1997) triggered if Taxpayer X and Taxpayer Y transfer all of their shares in Company Z to a third party buyer? | A1: CGT event K6 in section 104-230 of the ITAA 1997 will not be triggered if Taxpayer X and Taxpayer Y transfer all of their shares in Company Z to a third party buyer, as the applicable requirement in subsection 104-230(2) of the ITAA 1997 will not be satisfied.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. 1. Company Z is a private company conducting business activities. 2. Company Z was incorporated prior to 20 September 1985 and the shareholders comprise of Taxpayer X (2 ordinary shares) and Taxpayer Y (1 ordinary share). 3. In a financial year Company Z engages in numerous transactions as part of its business activities. 4. Company Z operates both primary production and non-primary production business activities and holds trading stock related to these activities in its financial statements. 5. Company Z's prior year tax returns have been prepared on the basis that Company Z is carrying on these business activities with all sales proceeds accounted for as assessable income and all inventory being accounted for on a trading stock basis. 6. Company Z derived profit from its trading and primary production business activities in each of the 2016, 2017, and 2018 income years. 7. Company Z owns no interests in another company or trust. 8. Taxpayer X and Taxpayer Y hold their shares in Company Z as pre-CGT assets. 9. Taxpayer X and Taxpayer Y are considering transferring their shares in Company Z to a third party buyer.

Relevant legislative provisions: Income Tax Assessment Act 1997 , section 70-10 | Income Tax Assessment Act 1997 , section 104-230

Reasons for decision: Summary: CGT event K6 in section 104-230 of the ITAA 1997 will not be triggered if Taxpayer X and Taxpayer Y transfer all of their shares in Company Z to a third party buyer, as the applicable requirement in subsection 104-230(2) of the ITAA 1997 will not be satisfied. | Detailed Reasoning - Detailed reasoning: CGT event K6 is designed to stop the potential avoidance of CGT where, instead of an entity disposing of an asset it acquired on or after 20 September 1985, the owners of pre-CGT interests in the interposed entity dispose of those interests. Both direct and indirect interests are caught. Under subsection 104-230(1) of the ITAA 1997, CGT event K6 happens if: a) a taxpayer owns shares in a company ...acquired before 20 September 1985; b) a CGT event A1, C2, E1, E3, E5, E6, E7, E8, J1 or K3 (relevant event) happens in relation to the shares; c) there is no roll-over for the other CGT event, and d) the applicable requirement in subsection 104-230(2) of the ITAA 1997 is met. | Detailed Reasoning - Section 104-230(2) of the ITAA 1997 requirement: the 75% test: The test in subsection 104-230(2) of the ITAA 1997 is satisfied only if one or both of the following tests are met: a) the market value of property of the company or trust (that is not its trading stock) that was acquired post-CGT equals or exceeds 75% of the net value of the company; b) the market value of interests the company or trust owned through interposed companies or trusts in property that was acquired post-CGT equals or exceeds 75% of the net value of the company. CGT event K6 can result in capital gains only. The time of the CGT event K6 is when the other event happens. You make a capital gain equal to that part of the capital proceeds from the share or interest that is reasonably attributable to the amount by which the market value of the property referred to in subsection 104-230(2) of the ITAA 1997 is more than the sum of the cost bases of that property. | Detailed Reasoning - Application to your situation: The proposed transfer of Taxpayer X and Taxpayer Y's Company Z shares will not trigger CGT event K6 because: (a) its inventory constitutes 'trading stock' under section 70-10 of the ITAA 1997; and (b) just before the proposed time of the transfer the market value of the property of Company Z (that is not its trading stock) that was acquired post-CGT does not equal or exceed 75% of the net value of Company Z. Subsection 70-10(1) of the ITAA 1997 provides that 'trading stock' includes 'anything produced, manufactured or acquired that is held for the purposes of manufacture, sale, or exchange in the ordinary course of a business'. It is considered that Company Z is carrying on a business that involves both trading and a primary production activity, and thus the inventory held is trading stock. The issue of whether an entity is carrying on a business is a question of fact: Ferguson v FCT (1979) 9 ATR 873. In paragraph 13 of Taxation Ruling TR 97/11 the Commissioner distils the following factors which the Courts have ruled as relevant in determining whether a taxpayer carries on a business: (a) a significant commercial purpose or character; (b) the purpose and intention of the taxpayer in engaging in the activity; (c) an intention to make a profit from the activity; (d) the activity is or will be profitable; (e) repetition and regularity of activity; (f) the activity is carried on in a similar manner to that of the ordinary trade; (g) the activity is organised and carried on in a businesslike manner and systematically records are kept; (h) the size and scale of the activity; (i) not a hobby, recreation or sporting activity; (j) a business plan exists; (k) there have been commercial sales of product; and (l) the taxpayer has knowledge or skill. Company Z's activities represent a business because: (a) the trading activities display a significant commercial purpose since: (i) there is a business plan in relation to the trading and primary production activity; (ii) the scale of the trading and primary production activity is significant and profitable. (b) Company Z conducts its trading activities with a view to making a profit and in the 2016, 2017 and 2018 income years it made significant material profits. It is expected that this will continue in future income years; (c) Company Z conducts its trading and primary production activity on a regular repetitive basis year in and year out. In relation to its trading there is a high level of activity each income year; (d) Company Z' trading activities are carried out in a business-like manner with all trading recorded and accounted for. The primary production activity is also accounted for in a business like manner. The trading sales, costs and profits made by Company Z are accounted for in formal financial accounts annually. The inventory held by Company Z represents 'trading stock' because it has been acquired for the purpose of sale in the ordinary course of the trading and primary production business activity. Support for the view that Company Z carries on a business can be found in Taxation Ruling TR 2019/1 where at paragraph 59 the Commissioner indicates that a company will generally be regarded as carrying on a business if it is maintained for a profit for its shareholders and invests in assets in gainful activities that have both a purpose and prospect of profit. As stated above, the inventory held by Company Z constitutes 'trading stock' under section 70-10 of the ITAA 1997, and just before the proposed time of the transfer the market value of the property of Company Z (that is not its trading stock) that was acquired post-CGT will not equal or exceed 75% of the net value of Company Z. As a result, the applicable requirement in subsection 104-230(2) of the ITAA 1997 will not be satisfied and CGT event K6 in section 104-230 of the ITAA 1997 will not be triggered if Taxpayer X and Taxpayer Y transfer all of their shares in Company Z to a third party buyer.