Private ruling: Capital gains tax – small business relief - 15 year exemption – exempt payments to CGT concession stakeholders
Date of advice: 16 February 2018
Published: June 2018
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the amount sheltered from tax by the application of indexation to the elements of the cost base of the Subject Land under section 110-36 form part of the “exempt amount” that can be paid by the private company to you (up to your respective stakeholder participation percentages) tax free under section 152-125(2)? | A1: No

Relevant facts and circumstances: You own shares in a private company. The private company owns land used for primary production (‘Subject Land’). The Subject Land was acquired in 1988. The private company proposes to dispose of the Subject Land, which will cause CGT event A1 to happen (‘Subject Event’). As a result of CGT event A1 happening a capital gain will result in relation to the Subject Event. The private company satisfies all of the requirements of section 152-110 of the ITAA 1997 and intends to disregard the capital gain arising on the Subject Event by application of the small business 15-year exemption contained in Subdivision 152-B (’15 Year Exemption’). Pursuant to section 152-125 of the ITAA 1997, you are a *CGT concession stakeholder of the private company and satisfy the requirements of section 152-125 of the ITAA 1997 so that you are able to receive the CGT exempt payment/s as calculated under subsection 152-125(2) of the ITAA 1997. Within two years after the Subject Event, payments relating to the exempt amount will be made to you. The total quantum of the payments to you in relation to the capital gain will be determined by applying the following formula in subsection 152-125(2) of the ITAA 1997 such that the payments made to you will be disregarded in determining your taxable income. Stakeholder’s participation percentage x Exempt amount Assumptions The private company will have satisfied the following basic conditions pursuant to section 152-10 of the ITAA 1997: ● private company is a *small business entity for the income year, or ● private company satisfies the maximum net asset value test in section 152-15 of the ITAA 1997 just before the CGT event occurs, and ● the Subject Land satisfies the active asset test in section 152-35 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 110A | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 104-10(4) | Income Tax Assessment Act 1997 Section 110-36 | Income Tax Assessment Act 1997 Section 110-36(1) | Income Tax Assessment Act 1997 Division 114 | Income Tax Assessment Act 1997 Section 114-1 | Income Tax Assessment Act 1997 Section 152-105 | Income Tax Assessment Act 1997 Section 152-110 | Income Tax Assessment Act 1997 Section 152-125 | Income Tax Assessment Act 1997 Subparagraph 152-125(1)(a)(i) | Income Tax Assessment Act 1997 Subsection 152-125(2) | Income Tax Assessment Act 1997 Section 960-275 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: A capital gain made by a small business entity from a CGT asset it has owned for at least 15 years will be disregarded if the small business entity satisfies the requirements of section 152-105 of the ITAA 1997 and section 152-110 of the ITAA 1997. In this case the company and the CGT asset (the Subject Land) satisfies the requirements of Subdivision 152-A, section 152-105 and section 152-110 of the ITAA 1997 such that the capital gain made on the disposal of Subject Land by the private company is able to be disregarded. A capital gain made by a company that qualifies for the small business 15-year exemption and is disregarded for the company may be distributed to a CGT concession stakeholder of the company as an exempt amount if certain conditions as set out in section 152-125 of the ITAA 1997 are satisfied. In this case, as the capital gain made by the private company on the disposal of the Subject Land will be disregarded and the payments to you, the company’s CGT concession stakeholder, are exempt from inclusion in your assessable income. Subsection 152-125(2) of the ITAA 1997 sets out the amount that a concessional stakeholder is able to exempt from inclusion as assessable income. Relevantly: In determining the taxable income of the company, the trust, the individual, or any of the interposed entities, disregard the total amount of the payment or payments made to the *CGT concession stakeholder, up to the following limit: Stakeholder's participation percentage × Exempt amount where: stakeholder's participation percentage means: in the case of a company or a trust referred to in item 2 of the table in subsection 152-70(1) - the stakeholder's *small business participation percentage in the company or trust just before the relevant *CGT event; or … For the purposes of the formula in subsection 152-125(2) of the ITAA 1997 the ‘exempt amount’ is determined in accordance with subparagraph 152-125(1)(a)(i) of the ITAA 1997, which states: This section applies if: (a) One or more of the following apply: (i) under section 152-110, a *capital gain (the exempt amount ) of a company or trust is disregarded; … The term ‘*capital gain’ is defined in section 995-1 as: capital gain: for each * CGT event a capital gain is worked out in the way described in that event. CGT event A1, section 104-10 of the ITAA 1997, occurs where there is a change of ownership from an entity to another person. The private company will dispose of the Subject Land and CGT Event A1 will happen. To the extent that it applies, subsection 104-10(4) of the ITAA 1997 sets out how to calculate the capital gain for CGT event A1 as follows: You make a capital gain … if the *capital proceeds from the disposal are more than the asset’s *cost base. … The term ‘cost base’ is defined in section 995-1 of the ITAA 1997 by reference to Subdivision 110A of the ITAA 1997. Section 110-36 of the ITAA 1997 provides for the indexation of the elements of the cost base in certain circumstances. Subsection 110-36(1) of the ITAA 1997 states: The cost base of a *CGT asset *acquired at or before 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999 also includes indexation of the elements of the cost base (except the third element) if the requirements of Division 114 are met. The Subject Land was acquired before the requisite time such that indexation of the applicable elements of the Subject Land’s cost base are included, subject to the requirements of Division 114 of the ITAA 1997 being met. Division 114 of the ITAA 1997 provides specific rules in relation to the indexation of a cost base. There is nothing in Division 114 of the ITAA 1997 which means that indexation is not to be applied to the relevant cost base elements of the Subject Land. However, as Note 1 to section 114-1 of the ITAA 1997 states, indexation does not take account of inflation after 30 September 1999 (in this regard see section 960-275 of the ITAA 1997). Therefore, the relevant elements of the cost base of the Subject Land must be indexed to 30 September 1999 to determine the amount of capital gain that qualifies for the small business 15-year exemption and is disregarded for the company and may be distributed to a CGT concession stakeholder of the company as an exempt amount. The amount that represents indexation does not form part of the capital gain of the company and cannot be paid to the CGT concession stakeholder as an exempt amount under section 152-125 of the ITAA 1997. Therefore the amount which represents the indexation of the elements of the cost base of the Subject Land pursuant to section 110-36 of the ITAA 1997 is not a *capital gain amount of the private company under section 152-110 of the ITAA 1997 and consequently not an ‘exempt amount’ that the private company can pay to you tax free under subsection 152-125(2) of the ITAA 1997.