Private ruling: Capital gains tax
Date of advice: 11 May 2016
Published: June 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Are your companies considered to be connected with you for the purposes of satisfying the basic conditions for the small business CGT concessions? | A1: Yes. | Q2: For the purposes of the CGT provisions, when you gift your shares in your companies and your partnership, are you deemed to have received the market value of the assets even though you will receive no actual proceeds? | A2: Yes.

Relevant facts and circumstances: You have majority ownership of two companies. You wish to gift your shares in the companies to a relative. You will not receive any proceeds for the shares. You also own a one third share in a partnership. You want to gift your share in the partnership to a relative. You will not receive any proceeds from this disposal. You advise that the partnership satisfies the $2 million aggregated turnover test and the maximum net asset value test on its own but neither of the tests will be met if the whole group of entities has to be considered.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 328-115 | Income Tax Assessment Act 1997 - Section 328-125 | Income Tax Assessment Act 1997 - Section 116-30

Reasons for decision: Summary: Section 116-30 of the ITAA 1997 states that if you receive no capital proceeds from a CGT event you are taken to have received the market value of the CGT asset that is the subject of the event. The market value is worked out as at the time of the event. As the disposal of your shares constitutes a CGT event and you advise that you will receive no proceeds from the transaction, section 116-30 of the ITAA 1997 will apply and you will use the market value of the CGT assets in calculating your capital gain or capital loss.

Reasons for decision: To qualify for any of the small business capital gains tax (CGT) concessions, there are certain basic conditions that must be satisfied. The first of the basic conditions specifies that you must be either a small business entity or satisfy the maximum net asset value test. | An entity will be a small business entity if it: | • carries on a business, and | Under section 328-115 of the Income Tax Assessment Act 1997 (ITAA 1997) 'aggregated turnover' means the entity's annual turnover plus the annual turnover of any entity that is connected or affiliated with it. | Alternatively, you satisfy the maximum net asset value test if the total net value of CGT assets owned by certain entities does not exceed $6 million just before the CGT event that results in the capital gain for which the concessions are sought. You must include the net value of CGT assets owned by you, any entities connected with you, and any of your affiliates and entities connected with your affiliates. | It should be noted that an entity that is an affiliate of, or connected with a partner is deemed to be an affiliate of, or connected with the partnership that uses the asset (where the entity is not already affiliated or connected with the partnership). | Under section 328-125 of the ITAA 1997 an entity is connected with another entity if either entity controls the other or both entities are controlled by the same third entity. | You control a company if you, your affiliates or you together with your affiliates have: | • shares and other equity interests in the company that give you and/or your affiliates at least 40% of the voting power in the company, or | • the right to receive at least 40% of any income or capital the company distributes. | Application to your circumstances | From the facts in your case it is considered that you control both companies because you and your affiliates have at least 40% of the voting power in the companies. Accordingly, the companies are considered to be connected with you and must therefore be grouped with your partnership for the purposes of satisfying the basic conditions for the small business CGT concessions.