Private ruling: CGT Small Business Concessions and Part IVA
Published: October 2014
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Questions and Answers | 1. Do you satisfy the basic conditions necessary to be eligible for the capital gains tax (CGT) concessions for small business? | Yes | 2. Do you satisfy the necessary conditions to be eligible for the retirement exemption? | Yes | 3. At the time of lodging your relevant income tax return, you will have attained the age of 55. Can you elect to apply section 152-315 and not rollover the CGT exempt component into a complying superannuation fund and apply the CGT exemption limit of $500,000? | Yes | 4. Will Part IVA apply to any aspect of the transactions? | No

Relevant facts and circumstances: The company was established in 20XX. You own 100% of the shares in the company in your personal capacity. The shares are ordinary class shares with entitlements to all voting, dividend and capital distributions. You are a specialist and are exposed to significant risk in relation to your practice and rely heavily on your professional indemnity insurance if you were to be sued. You also work for an employer. As such you have both employment and business income in addition to being owner of the company. You began the company to take pressure of yourself to earn income from personal exertion, often involving long hours. The company derives income from services conducted by qualified contractors to the business and through the use of equipment acquired by the business. The business has significantly grown resulting in the accumulation of a valuable asset in your name. You now feel exposed and this is against you desire for personal asset protection. You propose to sell the shares in the company to a family trust for market value estimated at $X million. The market value being determined based on a multiple of future maintainable earnings of the company. You are desirous of selling your shares in the company to the family trust for the following reasons: • So the shares are less at risk should there be a claim against you as a result of your position as a medical specialist in running your private practice; • So that the shares are no longer part of your estate for succession planning purposes, so they can be dealt with within the family through changing control of the trustee of the trust; • So that surplus profits of the company can be taken as dividends and used to acquire assets in the name of the trust. This will have both asset protection and succession planning benefits. • So that dividends when received in the future are not solely received by you but can be received by such beneficiaries as are determined by the trustee of the trust each year; and • So that you can direct future funds into superannuation which is an asset protected environment. You satisfy the basic conditions for small business concessions in relation to the following: • The 80% active asset test relating to the shares; • Satisfies the maximum net asset value test; and • The aggregate turnover is less than $2 million At the time of lodging your relevant income tax return, you will have attained the age of 55. Subject to available cash flows you may wish to contribute funds into superannuation as part of your retirement strategy.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 103-25 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subdivision 152-C | Income Tax Assessment Act 1997 Subdivision 152-E | 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 Subsection 152-315(4) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 Section 177A | Income Tax Assessment Act 1936 Section 177C | Income Tax Assessment Act 1936 Section 177D

Reasons for decision: Summary: As you satisfy the basic conditions for small business CGT concessions, you are entitled to the active asset reduction and the small business rollover. You can elect to apply section 152-315 and not rollover the CGT exempt component into a complying superannuation fund and apply the CGT exemption limit of $500,000 Part IVA would not apply to the proposed business reorganisation. | Detailed Reasoning - Small business CGT concession eligibility basic conditions: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in the gain. (c) at least one of the following applies: (i) you are a small business entity for the income year (ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. If these basic conditions are met, you are entitled to: • The small business 50% active asset reduction available under Subdivision 152-C of the ITAA 1997, unless you choose for it not to apply; and • Choose to obtain the small business rollover available under Subdivision 152-E of the ITAA1997. You have provided that: • The CGT event is in relation to a CGT asset that is an active asset. • The event will result in a capital gain. • You are a small business entity Therefore, you satisfy the basic conditions and are entitled to the small business active asset reduction and to choose the small business rollover. Retirement exemption You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. Subdivision 152-D of the ITAA 1997 provides that you can choose to disregard all or part of a capital gain if: • you satisfy the basic conditions, • if you are under 55 just before you make the choice - you contribute an amount equal to the asset's CGT exempt amount to a complying superannuation fund or an RSA. The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) must not exceed your 'CGT retirement exemption limit'. An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. Section 103-25 of the ITAA 1997 tells you when the choice must be made. Specifically, you must make the choice by the day you lodge your income tax return for the income year in which the relevant CGT event happened (or within further time allowed by the Commissioner). In addition subsection 152-315(4) of the ITAA 1997 requires that the CGT exempt amount must be specified in writing. In your case, you satisfy the basic conditions and as you will be 55 years of age at the time of making the choice to apply the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA, even though you may have been under 55 years old when the CGT event happens or when you receive the capital proceeds. | 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 if a taxpayer obtains a tax benefit in connection with a scheme, and it can be concluded that the scheme, or any part it, was entered into for the dominant purpose of enabling a tax benefit to be obtained. Part IVA is a provision of last resort. In order for Part IVA to apply, the following requirements must be satisfied: • There must be a scheme as defined by section 177A of the ITAA 1936. • There must be a tax benefit as defined by section 177C of the ITAA 1936, obtained in connection with the scheme • The scheme must be one to which Part IVA applies, as determined by section 177D of the ITAA 1936, where it would be concluded that the taxpayer (or any other person involved in the scheme) had the sole or dominant purpose of entering into the scheme to obtain the tax benefit. It is determined that Part IVA would not apply to the proposed business reorganisation.