Private ruling: Capital gains tax - small business concessions
Published: June 2015
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the market value of the B, C and D class shares at the time they are cancelled be nil for the purposes of the market value substitution rule contained in paragraph 116-30(2)(b)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: If the property is sold after the cancellation of the B, C and D class shares, can the Company choose to apply the small business retirement exemption to reduce the capital gain? | A2: Yes | Q3: If the property is sold after the cancellation of the B, C and D class shares, can the Company choose to apply the small business rollover to any remaining capital gain? | A3: Yes

Relevant facts and circumstances: The Company has ordinary shares plus A, B, C and D class shares on issue. The directors of the Company are X and Y. The Company intends to cancel the B, C and D class shares. The shares will be cancelled by 30 June 2015. A valuation report provides that the current market value of the B, C and D class shares is nil. The Company currently holds real property. The Company intends to dispose of the property and anticipates that the disposal will result in a capital gain. At the time the property is disposed of, the total net value of the Company's assets (including the assets of entities connected with or affiliated with the Company) will not exceed $6million. The Trust carries on a business The property was used by the Trust for the business for more than half of the time the property has been owned by the Company X and Y are the sole shareholders and directors of the trustee of the Trust. The Company intends to acquire a replacement warehouse no earlier than 1 year before or 2 years after the disposal of the property. X is over 55 years of age. Assumption(s) There will be no significant changes to the assets of the Company or to the Company's structure between the date of the Valuation and the date that the B, C and D class shares are cancelled.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 116-30 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 Subdivision 152-E

Reasons for decision: Detailed Reasoning - Share cancellations: Capital gains tax (CGT) event C2 occurs if your ownership of an intangible CGT asset ends by the asset being cancelled, abandoned or expiring (section 104-25(1) of the ITAA 1997). The time of the event is when you enter into the contract that results in the asset ending, or if there is no contract, at the time the asset ends. If the capital proceeds you receive from CGT event C2 are nil, or more or less than the market value of the asset, you will be deemed to have received the market value of the asset on the date of the CGT event (section 116-30 of the ITAA 1997). In this case, CGT event C2 will occur when the B, C and D class shares are cancelled. Having considered the circumstances in this case, we consider that the value of the shares at the time they are cancelled will be nil. Accordingly, the capital proceeds in relation to the C2 events will be nil for the relevant shareholders. | Detailed Reasoning - Small business concessions: To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'. Each concession also has further requirements that you must satisfy for the concession to apply (except for the small business 50% active asset reduction which applies if the basic conditions are satisfied). | Detailed Reasoning - Basic Conditions: In this case, it is accepted that the Company will meet the basic conditions contained in section 152-10 of the ITAA 1997 due to the following: • a CGT event will occur when the Royal Park property is disposed of • the event will result in a gain • the Company meets the maximum net asset value test; and • based on the use of the Royal Park property in the Trust's business (the trust being a connected entity), we consider that the asset meets the active asset test. The further requirements for each individual concession are discussed below. | Detailed Reasoning - Retirement exemption: The rules covering the small business retirement exemption are contained in Subdivision 152-D of the ITAA 1997. An entity may choose to disregard all or part of a capital gain under the retirement exemption if certain conditions are satisfied. If the entity is a company, they can choose to disregard all or part of a capital gain where all of the following conditions are met: • the company satisfies the basic conditions • the company satisfies the significant individual test (that is, there was at least one significant individual just before the CGT event) • a written record of the amount disregarded is kept and if there are more than one CGT concession stakeholders, each stakeholder's percent of the exempt amount (one may be nil, but together they must add up to 100%) (section 152-315 of the ITAA 1997) • a payment is made to at least one of the CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount (section 152-325 of the ITAA 1997); and • the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less. The payment to the CGT concession stakeholders must be made by the later of seven days after making the choice or seven days after you receive the capital proceeds from the relevant CGT event. The amount of the capital gain the company disregards cannot exceed the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment. 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. If a CGT concession stakeholder is under 55 years of age just before a payment is made in relation to them, the company must make the payment by contributing it to a complying superannuation fund or RSA on their behalf. There is no requirement to make this contribution if the stakeholder is 55 years or older. In this case, the Company satisfies the basic conditions for the small business concessions. Where the property is disposed of after the cancellation of the B, C and D class shares, X will be the sole shareholder of the Company and therefore the only CGT concession stakeholder and significant individual of the Company. Accordingly, the Company may choose to apply the CGT retirement exemption to reduce the capital gain made on the sale of the property. Note: If the Company makes the choice to apply the retirement exemption it must be made in writing and comply with the other requirements contained in section 152-315 and 152-325 of the ITAA 1997 explained above. Additionally, a payment of the exempt amount will need to be paid to X within seven days of making the choice (or within seven days of receiving the proceeds if this is later). As X is over 55 years of age, there is no requirement that this payment is made to a complying superannuation fund. | Detailed Reasoning - Small business rollover: The small business rollover contained in Subdivision 152-E of the ITAA 1997 allows you to defer all or part of a capital gain made from a CGT event happening to an active asset. To qualify for the small business rollover, you need to satisfy the basic conditions that apply to all the CGT small business concessions. There are rollover conditions that must also be met, however you can choose to obtain a rollover even if you have not yet acquired a replacement asset or incurred expenditure on a capital improvement to an existing asset. The rollover conditions must be satisfied by the end of the replacement asset period. This period starts one year before and ends two years after the last CGT event that occurs in the income year for which you choose the rollover. If the rollover conditions are not met within the replacement asset period, the gain will become assessable. As the Company satisfies the basic conditions, it is able to choose to apply the small business rollover. The Company may choose to apply the rollover to as much of the capital gain as it decides.