Private ruling: CGT small business concessions
Date of advice: 28 June 2017
Published: October 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are any of the Taxpayers connected with or an affiliate of any of the other shareholders in the X Group Entities pursuant to section 328-125 and 328-130 of the Income Tax Assessment Act 1997 (ITAA 1997) as at the Share Sale Date? | A1: No | Q2: Are any of the X Group Entities connected with or affiliates of any of the Taxpayers under sections 328-125 and 328-130 of the ITAA 1997 as at the Share Sale Date? | A2: No | Q3: Will the basic conditions, contained in section 152-10 of the ITAA 1997, be satisfied with respect to the sale of the shares in the X Group Entities by the Taxpayers? | A3: Yes | Q4: Will the Taxpayers be eligible to reduce the capital gain on the sale of the shares in the X Group Entities by 50% under section 152-205 of the ITAA 1997? | A4: Yes

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. The Taxpayers do not carry on a business in their own right. The X Group Entities collectively carry on a business. The X Group Entities are incorporated in Australia and are therefore Australian residents for tax purposes. Each of the X Group Entities have X directors. On the Share Sale Date, an unrelated party, agreed to purchase a percentage of the shares in the X Group Entities. You have provided Balance Sheets for all of the X Group Entities as at the Share Sale Date. There have been no changes to the nature of the assets held by these entities since incorporation. Just before the Share Sale Date, each of the Taxpayers held between more than 20% of the shares in each of the X Group Entities. Each of the Taxpayers have not made trust distributions of either income or capital to any of the other shareholders or Taxpayers of the X Group Entities in any of the prior four years of income. As each of the Taxpayers had a nominal cost base in the shares in the relevant X Group Entities, the Taxpayers derived a capital gain under CGT event A1 on entering into the contract. The Taxpayers have entered into shareholder agreements in relation to each of the X Group Entities (referred to collectively as “the Shareholder Agreements”). The management of each of the X Group Entities’ businesses is undertaken by the Board, the composition of which comprises three directors. The Board of manages the day-to-day operations of the respective X Group Entities. Each of the directors of the X Group Entities are unrelated to each other and conduct their affairs independently. In exercising their vote as a shareholder, the Taxpayers act independently in relation to all decisions in their own best interests. Each of the Taxpayers will distribute at least 90% of the income and capital to a single beneficiary in the 2016-17 income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | 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 Section 152-205 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 328-130

Reasons for decision: Detailed Reasoning - Connected entities: The meaning of a connected entity is defined under section 328-125 of the ITAA 1997 which states as follows: An entity is connected with another entity if: (a) either entity controls the other entity in the way described in this section; or (b) both entities are controlled in a way described in this section by the same third entity. Different control rules apply to different types of entities. That is, different control tests apply to companies, non-discretionary trusts, discretionary trusts and partnerships. | Detailed Reasoning - Connected with an entity other than a discretionary trust: The direct control rules for a non-discretionary trusts, companies and partnerships are contained in subsection 328-125(2) of the ITAA 1997. Paragraph 328-125(2)(a) of the ITAA 1997 provides that you control a company or non-discretionary trust if you, your affiliates, or you together with your affiliates beneficially own, or have the right to acquire the beneficial ownership of, interests in the entity that carry between them the right to receive a percentage (the control percentage ) that is at least 40% of any distribution of income or capital by the entity. Paragraph 328-125(2)(b) of the ITAA 1997 provides that you control a company if you, your affiliates, or you together with your affiliates beneficially own, or have the right to acquire the beneficial 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 - Connected with a discretionary trust: An entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates, or the first entity together with its affiliates (subsection 328-125(3) of the ITAA 1997). An entity (the first entity) also controls a discretionary trust for an income year if, for any of the 4 income years before that year: a) the trustee of the trust paid to, or applied for the benefit of: i. the first entity; or ii. any of the first entity’s affiliates; or iii. the first entity and any of its affiliates; any of the income or capital of the trust; and b) the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year. | Detailed Reasoning - Indirect control of an entity: An entity can control another entity indirectly in the manner described in subsection 328-125(7) of the ITAA 1997: This section applies to an entity (the first entity) that directly controls another entity (the second entity) as if the first entity also controlled any other entity that is directly, or indirectly by any other application or application of this section, controlled by the second entity. | Detailed Reasoning - Affiliates: An affiliate is defined by section 328-130 of the ITAA 1997 as being an individual or company who 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. Relevant factors that may support a finding that a person acts in such a manner 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. Trusts, partnerships and superannuation funds cannot be your affiliates. However a trust, partnership or superannuation fund may have an affiliate who is an individual or company. | Detailed Reasoning - Question 1: In this case, there have been no distributions of income or capital between any of the Taxpayers or the other shareholders (or associated parties). Based on the information provided in relation to the actions and relationships between the relevant parties, we accept that none of the other shareholders of the X Group Entities control any of the Taxpayers (or vice versa) within the meaning contained in section 328-125 of the ITAA 1997. Furthermore, all of the shareholders of the X Group Entities, including the Taxpayers, are trusts. Accordingly, each of the Taxpayers cannot be an affiliate of any of the other shareholders in the X Group Entities. | Detailed Reasoning - Question 2: As none of the X Group Entities’ shareholders are connected with or affiliates of each other, their control percentages are not combined in determining if they are connected with any of the X Group Entities. Accordingly, as each of the Taxpayers hold less than 40% in each of the X Group Entities, and the X Group Entities have not received any distributions of income or capital from the Taxpayers in the previous four income years, none of the X Group Entities are connected with any of the Taxpayers. In order for any of the X Group Entities to be considered affiliates of the Taxpayers, it would need to be determined that the X Group Entities act, or could reasonably be expected to act, in accordance with the directions or wishes of the Taxpayers in relation to their business affairs. We have taken into consideration the formal relationships and agreements between the relevant parties, and do not consider that any of the X Group Entities are affiliates of any of the Taxpayers. | Detailed Reasoning - Small business concessions – basic conditions: In order to be eligible for the small business capital gains tax (CGT) concessions, a number of basic conditions must be satisfied. The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997: (a) a CGT event happens in relation to an asset that the taxpayer owns (b) the event would otherwise have resulted in a capital gain (c) one or more of the following applies (i) the taxpayer satisfies the maximum net asset value test (ii) the taxpayer is a "small business entity" for the income year (iii) the asset is an interest in an asset of a partnership which is a small business entity for the income year, and the taxpayer is a partner in that partnership, or (iv) the special conditions for passively held assets in sub-sections 152-10(1A) or 152-10(1B)are satisfied in relation to the CGT asset in the income year and (d) the asset satisfies the active asset test. Under subsection 152-10(2) of the ITAA 1997, if the CGT asset is a share in a company or an interest in a trust (the object company or trust), one of these additional basic conditions must be satisfied just before the CGT event: (a) you are a CGT concession stakeholder in the object company or trust; or (b) CGT concession stakeholders in the object company or trust together have a SBPP in you of at least 90%. A trust cannot satisfy the condition in paragraph (a) because a CGT concession stakeholder in the object company must be an individual. In this case, CGT event A1 occurred on the Share Sale Date resulting in a capital gain for the Taxpayers. The remaining basic conditions are considered below: | Detailed Reasoning - Maximum Net Asset Value (MNAV) Test: Section 152-15 of the ITAA 1997 explains that you satisfy the MNAV test if, just before the CGT event, the sum of the following amounts does not exceed $6 million: 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)). Based on the statements you have provided, we accept that the Taxpayers will meet the MNAV test just before the CGT event. | Detailed Reasoning - Active asset test: Under section 152-35 of the ITAA 1997, a CGT asset satisfies the active asset test if: ● 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 test period; or ● 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 test period. The test period: ● begins when you acquired the asset, and ● ends at the earlier of ● the CGT event, and ● when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows). A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you. Subsection 152-40(3) of the ITAA 1997 determines that a share in a company that is an Australian resident can also be an active asset. This is provided that the total of: ● the market values of the active assets of the company or trust; and ● the market value of any financial instruments of the company or trust that are inherently connected with a business that the company or trust carries on; and ● any cash of the company or trust that is inherently connected with such a business; is 80% or more of the market value of all of the assets of the company or trust. In this case, we accept that at least 80% of the assets of the X Group Entities have been active for the relevant period. | Detailed Reasoning - Additional basic condition for shares: The additional basic condition contained in subsection 152-10(2) of the ITAA 1997 will only be met if just before the CGT event, there are CGT concession stakeholders in each of the X Group Entities that hold a small business participation percentage in each of the Taxpayers of at least 90%. In this case, the shareholding in all of the X Group Entities was at least 24%. As the Taxpayers will distribute at least 90% of the income and capital to a single beneficiary in the 2016-17 income year, those single individual beneficiaries will be a CGT concession stakeholder in each of the X Group Entities (per section 152-60 of the ITAA 1997) and will have a small business participation percentage in the relevant Taxpayer of 90% (per sections 152-65 and 152-70 of the ITAA 1997). Accordingly, the Taxpayers meet all of the basic conditions contained in section 152-10 of the ITAA 1997. | Detailed Reasoning - Small business 50% active asset reduction: The rules covering the small business 50% active asset reduction are contained in Subdivision 152-C of the ITAA 1997. To apply the small business 50% active asset reduction, you only need to satisfy the basic conditions for relief under section 152-10 of the ITAA 1997. There are no further requirements. As all of the basic conditions contained in section 152-10 of the ITAA 1997 have been met, the Taxpayers can apply the small business 50% active asset reduction contained in section 152-205 of the ITAA 1997.