Private ruling: Small business CGT concessions – basic conditions
Date of advice: 14 September 2018
Published: November 2018
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does Company A satisfy the basic conditions for relief described in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: History of the Business Company A was incorporated on date X and carried on a business trading under the same name. The business originally concentrated on sales, earnings and sale commissions. Company A commenced a different activity which involved the purchase of asset B. Company A contracted on date X to purchase asset B to augment its existing business. Ownership of Company A Individual C was the sole and only shareholder and Director of Company A. The Transaction On Date X, Company A entered into an Agreement for Sale of asset B to an unrelated third party. for $X. The gross consideration received was $X. The sale included business assets of Company A. Company A ceased trading at the time of the sale. Details of the market value of asset B and the methodology used was provided. The Calculation of Net Capital Gain on sale of asset B was provided. Turnover of Company A Company A had an annual turnover of $X for 20XX financial year and was tracking to exceed $X million in revenue for the 20XX financial year up to the time of sale. The Assets and Liabilities held by Company A as at X date was provided. Assets and Liabilities of individual C as at X date was provided. The assets and liabilities of individual C included assets at their market value at the time of the sale and liabilities pertaining to each asset are also shown in an attachment to the application for private ruling. The liabilities of individual C include a provision for personal income tax payable by individual C on income derived for the year until the date of sale. The list of CGT assets of individual C do not include a 100% interest in a property at X address as this property was the principal residence of individual C (subparagraph 152-20(2)(b)(ii) of the ITAA 1997 exclusion). The following matters are relevant in respect of the market valuation assigned to the following CGT assets: ● Property 1 Three market valuations were provided for property 1. These values were obtained in the period before the time of sale. All three valuations had a top value of $X. ● Property 2 Sale documents were exchanged for this property on date 20XX. Sale transfer document was provided. The price paid was $X. ● Property 3 Purchase document was provided at date X for a price of $X. ● Share Portfolio Market values of Share Portfolio were provided as at close of trading on ASX on date of sale of asset B. ● Bank Loans The bank loans are not linked a specific investment but used in general investing. The Estate of the late S S passed away on date X. Part of S’s Estate was inherited by individual C. The Estate was still being administered by the executors at the time of the sale of asset B. Transfer of Property 4 ● On date X, individual C transferred a half share of the property 4 to another party. ● The applicant has provided a Certificate of Value for property 4 which values the half-share as at date X for $X.. Assignment of legal and beneficial interest in S’s Estate The applicant has advised that individual C executed the Deed of Assignment prior to the sale of the asset B by Company A. Individual E Individual C’s spouse, Individual E, commenced as an employee of Company A on X date and was terminated just before the sale. Individual E was not a Director or shareholder of Company A and had no input in the running of the business. Other relevant entities Company A or individual C did not control of any other entities at the time of sale, and they were not controlled by any other entities. There are no other connected entities for the purposes of Division 152 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 paragraph 108-5(2)(a) | 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 paragraph 152-10(1)(a) | Income Tax Assessment Act 1997 paragraph 152-10(1)(b) | Income Tax Assessment Act 1997 paragraph 152-10(1)(c) | Income Tax Assessment Act 1997 sub paragraph 152-10(1)(c)(ii) | Income Tax Assessment Act 1997 paragraph 152-10(1)(d) | Income Tax Assessment Act 1997 subsection 152-10(1AA) | Income Tax Assessment Act 1997 subsection 152-10(1A) | Income Tax Assessment Act 1997 subsection 152-10(1B) | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 subsection 152-20(1) | Income Tax Assessment Act 1997 subparagraph 152-20(1)(b)(iv) | Income Tax Assessment Act 1997 subparagraph 152-20(2)(b)(ii) | Income Tax Assessment Act 1997 subsection 152-20(2) | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 subsection 152-35(1) | Income Tax Assessment Act 1997 subsection 152-35(2) | Income Tax Assessment Act 1997 subsection 152-40(1) | 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 paragraph 152-40(1)(b) | Income Tax Assessment Act 1997 section 328-110 | Income Tax Assessment Act 1997 subsection 328-110(1) | Income Tax Assessment Act 1997 subsection 328-110(4) | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 subsection 328-125(1) | Income Tax Assessment Act 1997 paragraph 328-125(1)(a) | Income Tax Assessment Act 1997 subsection 328-125(2) | Income Tax Assessment Act 1997 paragraph 328-125(2)(a) | Income Tax Assessment Act 1997 subsection 328-130(1)

Reasons for decision: Summary: Company A (You) satisfies the basic conditions for relief pursuant to section 152-10 of the ITAA 1997 in respect of the capital gain made on the disposal of asset B. | Detailed Reasoning - Detailed reasoning: There are certain capital gains tax (CGT) concessions specifically available to small business taxpayers. There are conditions that must be satisfied to obtain access to the concessions set out in Subdivision 152-A of the ITAA 1997. The basic conditions are set out in section 152-10 of the ITAA 1997. They are: (1) a CGT event happens in relation to a CGT asset that the taxpayer owns: paragraph 152-10(1)(a) of the ITAA 1997 (2) the event would otherwise have resulted in a capital gain: paragraph 152-10(1)(b) of the ITAA 1997 (3) at least one of the following applies (paragraph 152-10(1)(c) of the ITAA 1997): (a) the taxpayer is a "CGT small business entity" for the income year (b) the taxpayer satisfies the maximum net asset value test (c) the taxpayer is 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 and (d) the conditions mentioned in subsection 152-10(1A) or 152-10(1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year (4) the asset satisfies the active asset test: paragraph 152-10(1)(d) of the ITAA 1997. These basic conditions are discussed below | Detailed Reasoning - (1) Paragraph 152-10(1)(a): a CGT event happens in relation to a CGT asset of yours in an income year: CGT event A1 happened on X date when Company A entered into the Agreement for Sale of asset B to an unrelated third party. Consequently, the requirements of paragraph 152-10(1)(a) of the ITAA 1997 are satisfied. | Detailed Reasoning - (2)Paragraph 152-10(1)(b): the event would (apart from this Division) have resulted in the gain: You have advised that the cost base of the asset B was $X and therefore based on the consideration received of $X under the Agreement for Sale of the asset B, a capital gain arose from the sale of the asset B by Company A. Consequently, the requirements of paragraph 152-10(1)(b) of the ITAA 1997 are satisfied. ( 3) Paragraph 152-10(1)(c): at least one of the following applies : | Detailed Reasoning - (b) (subparagraph 152-10(1)(c)(i)): CGT small business entity is defined in subsection 152-10(1AA) of the ITAA 1997. It states: You are a CGT small business entity for the income year if: (a) you are a small business entity for the income year; and (b) you would be a small business entity for the income year if each reference in section 328-110 to $XX million were a reference to $X million. Where we refer to section 328-110 of the ITAA 1997 the $XXMillion is shown as $Xmillion for purposes of these Reasons of Decision as per subsection 152-10(1AA) of the ITAA 1997. “Small business entity” is defined in subsection 328-110(1) of the ITAA 1997. An entity is a small business entity if it: (a) Carried on a business in the current year; and (b) One or both of the following applies: (i) it carried on a business in the income year (the previous) year before the current year and its aggregated turnover for the previous year was less than $2 million, and (ii) its aggregated turnover for the current year is likely to be less than $2 million Company A is not a CGT small business entity for the relevant income year under subsection 328-110(1) of the ITAA 1997 because its aggregate turnover was in excess of $2 million for the 20XX year and is also likely to exceed this threshold in the 20XX year. A taxpayer may also be a small business entity under subsection 328-110(4) of the ITAA 1997 if its aggregated turnover for the current year, worked out as at the end of the current year, is less than $2 million. However that when applying this method, if an entity starts or ceases a business part way through an income year, it will need to work out its turnover using a ‘reasonable estimate’ of what its turnover would have been if it had carried on the business for the entire income year. Accordingly this test will also not be met in the current circumstances. | Detailed Reasoning - (c) you satisfy the maximum net asset value test (subparagraph 152-10(1)(c)(ii)): This criterion is considered in detail below. (d) 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 | Detailed Reasoning - (e) (subparagraph 152-10(1)(c)(iii)): This requirement is not applicable to the current circumstances. (f) the conditions mentioned in subsection 152-10(1A) or 152-10(1B) are satisfied in relation to the CGT asset in the income year (subparagraph 152-10(1)(c)(iv)) Subsection 152-10(1A) of the ITAA 1997 provides: | Detailed Reasoning - Passively held assets - affiliates and entities connected with you: The conditions in this subsection are satisfied in relation to the *CGT asset in the income year if: (a) your *affiliate, or an entity that is *connected with you, is a *small business entity for the income year; and (b) you do not carry on a *business in the income year (other than in partnership); and (c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and (d) in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b) ) in relation to the CGT asset. The conditions in this subsection would not appear to be met in the current circumstances primarily because: ● An affiliate or entity connected with Company A is not a small business entity during the income year; and ● Company A was carrying on a business in the 20XX income year. Consequently the conditions in subsection 152-10(1A) of the ITAA 1997 will not be satisfied. Subsection 152-10(1B) of the ITAA 1997 is not relevant as it concerns passively held assets of partnerships. | Detailed Reasoning - Maximum Net Asset Value Test - Subparagraph 152-10(c)(ii): Section 152-15 of the ITAA 1997 sets out the maximum net asset value test. It provides that you satisfy the maximum net asset value 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)). A CGT asset is any kind of property, or a legal or equitable right that is not property (subsection 108-5(1)). It also includes part of, or an interest in, such property or rights (paragraph 108-5(2)(a)). In the current circumstances, to assess whether the maximum net asset value test is met, it is initially necessary to determine which entities may be connected with Company A. | Detailed Reasoning - Connected entity: Connected entity is defined in subsection 328-125(1) of the ITAA 1997 as: (a) either entity controls the other entity in a way described in this section; and (b) both entities are controlled in a way described in this section by the same third entity There are different control tests in section 328-125 of the ITAA 1997 that apply depending on what type of entity is being tested. Relevantly, direct control of an entity other than a discretionary trust is defined in subsection 328-125(2) as: An entity (the first entity ) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: (a) except if the other entity is a discretionary trust – own, or have the right to acquire the ownership of, interests in the other entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of: (i) any distribution of income by the other entity; or (ii) if the other entity is a partnership – the net income of the partnership; or (iii) any distribution of capital by the other entity; or (b) if the other entity is a company – own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise or control the exercise of, a percentage (the control percentage ) that is at least 40% of the voting power in the company. | Detailed Reasoning - Is Company A connected with individual C?: Individual C is the sole shareholder and Director of Company A and accordingly controls Company A since C owns at least 40% of the equity interests in this company. Therefore because individual C controls Company A individual C is connected with Company A in accordance with paragraph 328-125(1)a) of the ITAA 1997. Accordingly, as individual C is connected with Company A, it is necessary to include the net value of the CGT assets owned by individual C in the maximum net asset value test. | Detailed Reasoning - Is individual C (and in turn Company A) connected with the deceased estate of S.: A beneficiary of an unadministered deceased estate does not own, or have the right to acquire ownership of, interests in the unadministered estate which carry rights to receive any distributions of income or capital. The beneficiary therefore does not control (and hence is not connected with) the estate under paragraph 328-125(2)(a) of the ITAA 1997 (see ATO Interpretative Decision ATOID 2010/106 I ncome Tax Small business concessions: connected entities – ‘control’ of an unadministered deceased estate ).). According, individual C does not own, or have the right to acquire ownership of, interests in the unadministered estate of S. | Detailed Reasoning - CGT assets of the deceased estate: Prior to the sale of the asset B on X date, individual C disposed of individual C’s interest in various CGT assets stemming from the estate as follows: ● on X date, individual C transferred a half share of the property 4 to another party; and ● in accordance with an undated Deed of Assignment that was executed prior to the sale of the asset B by Company A, individual C has assigned an absolute and entire legal and beneficial interest in the deceased estate of S. As a result, based on the information provided, individual C did not hold the relevant interest in these CGT assets just before the relevant CGT event on date X and accordingly these CGT assets would not form part of the CGT assets of individual C for the purposes of the maximum net asset value test. Based on the information provided, Company A is not controlled by, nor does it control any other entities and therefore is not connected with any other entities. | Detailed Reasoning - Affiliates: The maximum net asset value test also includes the net value of the CGT assets of any affiliates of a taxpayer (or entities connected with your affiliates). Subsection 328-130(1) of the ITAA 1997 provides that an individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company. Whether a person acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, is a question of fact dependent on all the circumstances of the particular case. Relevant factors include: ● the existence of a close family relationship between the parties ● the lack of any formal agreement or formal relationship between the parties dictating how the parties are to act in relation to each other ● the likelihood that the way the parties act, or could reasonably be expected to act, in relation to each other would be based on the relationship between the parties rather than on formal agreements or legal or fiduciary obligations, and ● the actions of the parties. In this regard, it is noted that, there is nothing to suggest from the information provided that individual E would be an affiliate of Company A or individual C. | Detailed Reasoning - Calculation of the maximum net asset value: As mentioned above, section 152-15 of the ITAA 1997 provides that maximum net value asset test is satisfied if the sum of the net value of the CGT assets of yours, any entities connected with you, and any of your affiliates or entities connected with your affiliates does not exceed $6,000,000. It has been established that Company A and individual C are connected with each other. Subsection 152-20(1) of the ITAA 1997 provides the meaning of net value of the CGT assets. It states: The net value of the CGT assets of an entity is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market value 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 . Subsection 152-20(2) of the ITAA 1997 notes however that the following assets should be disregarded when working out the net value of the CGT assets of an entity: It states: (a) disregard *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, disregard: (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. Based upon the information supplied, Company A satisfies the maximum net asset value test because the net value of its CGT assets and those of individual C (with whom it is connected with) does not exceed $6,000,000. In relation to this calculation, the following comments are made: ● It would seem reasonable to accept the contended market value of the Properties as these amounts are supported by either valuations from real estate agents or with reference to the subsequent sale price of the Property to an unrelated third party. ● The Property at X address owned by individual C is correctly excluded under subparagraph ● 152-20(2)(b)(ii) of the ITAA 1997 given that it is individual C’s principal residence. ● The market value of the asset B appears reasonable given that it is based on the actual consideration received from the sale. ● The methodology i.e. the ASX price at the close of trade on date X for calculating the market value of the Share Portfolio appears reasonable. ● The provision for income tax relating to individual C would seem reasonable and able to reduce the market value of the CGT assets under subparagraph 152-20(1)(b)(iv) of the ITAA 1997. ● As previously highlighted, the CGT assets of the estate of S (other than a 50% share in ● property 4) were not CGT assets of individual C just before the relevant CGT event and accordingly not taken into account in this calculation. Accordingly, Company A satisfies the requirements of subparagraph 152-10(1)(c)(ii) of the ITAA 1997 and in turn paragraph 152-10(1)(c) of the ITAA 1997. | Detailed Reasoning - (4) Paragraph 152-10(1)(d): the CGT asset satisfies the active asset test: Section 152-35 of the ITAA 1997 sets out when a CGT ass et qualifies as an active asset: | Detailed Reasoning - 152-35(1): 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 period specified in subsection (2); 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 7½ years during the period specified in subsection (2). | Detailed Reasoning - 152-35(2): The period: a) begins when you *acquired the asset; and b) ends at the earlier of: (i) the *CGT event; and (ii) if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows—the cessation of the business Subsection 152-40(1) of the ITAA 1997 relevantly defines “active asset” as: A CGT asset is an active asset at a time if, at that time: (a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a *business that is carried on (whether alone or in partnership) by: (i) you; or (ii) your *affiliate; or (iii) another entity that is *connected with you; or (b) if the asset is an intangible asset - you own it and it is inherently connected with a business that is carried on (whether alone or in partnership) by you, your affiliate, or another entity that is connected with you. The CGT assets (and in particular asset B) disposed of under the Agreement for Sale of asset B of X date are assets associated with the business of Company A and are therefore an active asset within the above definition. These CGT assets were owned for 15 years or less and were active assets of Company A for at least half the ownership period (in this case 100% of the ownership period). Accordingly, the CGT assets satisfy the active asset test. | Detailed Reasoning - Conclusion: The basic conditions for the small business CGT concessions are set out in Subdivision 152-A of the ITAA 1997. The key basic conditions relevant in this case are the maximum net asset value test and the active asset test. As discussed above, Company A will satisfy the maximum net asset value test and asset B is an active asset. Therefore, the basic conditions specified in section 152-10 of the ITAA 1997 have been satisfied.