Private ruling: CGT small business concessions and Part IVA
Published: October 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: 1. Do you qualify for the capital gains tax (CGT) small business 50% active asset reduction on the sale of your shares? | A2: No.

Relevant facts and circumstances: You operated a business through a company structure (the company). You were a key player in the development and operation of the company and were heavily relied upon for advice and instruction by other local business partners. In the 2010-11 financial year, your share holding in the company dropped below 20%. Prior to this your share holding had always been 25% or greater. In the months prior to your retirement, your share sales were an integral part of your succession planning. You continued as a significant influence on the operations of the business during this time. In the 2011-12 financial year, you purchased additional shares in the company from fellow share holder at market value which increased your shareholding to more than 20%. Soon after, you sold your original share holding and made a capital gain. The additional shares were sold back to the fellow shareholder soon after for the same price they were purchased for. There were no CGT gains or losses as a result of the purchase and resale of the additional shares. Your influence on the business is acknowledged through the fact that the fellow shareholder agreed to the temporary sale of the additional shares. You satisfy the maximum net asset test for small business CGT concession purposes. 80% or more of the company's assets are active assets.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Division 152 | Income Tax Assessment Act 1997 - Subdivision 152-A | Income Tax Assessment Act 1997 - Section 152-20 | Income Tax Assessment Act 1997 - Section 152-40 | Income Tax Assessment Act 1997 - Section 152-50 | Income Tax Assessment Act 1997 - Section 152-55 | Income Tax Assessment Act 1997 - Section 152-60 | Income Tax Assessment Act 1997 - Section 152-65 | Income Tax Assessment Act 1997 - Section 152-70 | Income Tax Assessment Act 1997 - Subdivision 152-C | Income Tax Assessment Act 1997 - Section 152-205 | Income Tax Assessment Act 1936 - Section 177A. | Income Tax Assessment Act 1936 - Section 177C. | Income Tax Assessment Act 1936 - Section 177D. | Income Tax Assessment Act 1936 - Section 177F.

Reasons for decision: Summary: To qualify for the small business CGT concessions, you must first satisfy the 'basic conditions' that are common to all the concessions. STEP 1 - You must first satisfy one of the following: · you are a small business entity · you do not carry on business (other than as a partner) but your asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (passively held assets) · you are a partner in a partnership that is a small business entity, and the CGT asset is · an interest in a partnership asset (partnership assets), or · an asset you own that is not an interest in a partnership asset (partner's assets) · you satisfy the maximum net asset value test. In your case, you are not carrying on a business, either alone or in partnership. However, you do satisfy the maximum net asset test. STEP 2 - The asset must satisfy the active asset test. A share in an Australian resident company is an active asset at a given time if you own it and the total market value of the active assets and any financial instruments and cash of the company is 80% or more of the market value of all of the assets of the company. This means a share in a company is an active asset if the company itself has active assets with a market value of at least 80% of the market value of all its assets. In this case, 80% or more of the company's assets are active assets. In your case, you have owned the shares for less than 15 years and the active asset test is satisfied if the shares have been an active asset of yours for a total of at least half of the test period. The test period begins when you acquired the shares, and ends at the disposal of the shares; the CGT event. The shares have been active assets of yours for at least half the test period and therefore satisfy the active asset test. STEP 3 - Only applicable if the CGT asset is a share in a company or interest in a trust. Where this is the case, one of these additional basic conditions must be satisfied just before the CGT event: · the entity claiming the concession must be a CGT concession stakeholder in the company or trust, or · CGT concession stakeholders in the company or trust together have a small business participation percentage in the entity claiming the concession of at least 90% (the 90% test). In your case, as you are the entity claiming the concession, you must be a CGT concession stakeholder in the company just before the sale of the shares. An individual is a CGT concession stakeholder of a company if they are a significant individual. An individual is a significant individual in a company if they have a small business participation percentage of at least 20% - this 20% can be made up of direct and indirect percentages. An entity's direct small business participation percentage in a company is the percentage of: · voting power that the entity is entitled to exercise or · any dividend payment that the entity is entitled to receive, or · any capital distribution that the entity is entitled to receive, or · if they are different, the smallest of the three percentages above. In your case, when you disposed of your original shares in the company in the 2011-12 financial year, you held more than 20% of the total issued shares, including attached voting power and dividend and capital distribution entitlements. As a result, you were a significant individual of the company and, therefore, a CGT concession stakeholder in the company just before the CGT event. | Detailed Reasoning - 50% active asset reduction: Unlike the other small business concessions, the small business 50% active asset reduction applies automatically if the basic conditions are satisfied, unless you choose for it not to apply. To apply the small business 50% active asset reduction, you need to satisfy only the basic conditions. There are no further requirements. As discussed above, you satisfy the basic conditions and the small business 50% active asset reduction will apply. | Detailed Reasoning - Part IVA: Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance provision that can apply in certain circumstances. Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. In broad terms, Part IVA will apply where the following requirements are satisfied: · there is a scheme (see section 177A); · a taxpayer has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme (see section 177C); and · the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b)). The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case. In your case, the circumstances of what you took place is a 'scheme' capable of attracting the operation of Part IVA. However, when considered in conjunction with the factors in paragraph 177D(b) of the ITAA 1936, all these factors either point against the application of Part IVA or are neutral. Therefore, Part IVA will not apply to this arrangement.

2. Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the arrangement?