Private ruling: Capital gains tax – small business concessions – trust sells shares in companies carrying on business
Date of advice: 10 April 2018
Published: June 2018
Ruling period: 2017-18 income year | 2018-19 income year
Date scheme commenced: 1 July 200A

Ruling: Q1: Will the Trust satisfy the requirements of section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the sale of its Company P shares? | A1: No. | Q2: Will the Trust satisfy the requirements of section 152-110 of the ITAA 1997 in respect of the sale of its Company D shares? | A2: No.

Relevant facts and circumstances: The following entities are relevant to the questions raised: Company D Pty Ltd ( Company D ): ● Was registered with ASIC in 200A ● Is just over F% owned by an unrelated individual ● Owns the property that is the subject of this ruling (the Property ) which is at least G% of the market value of assets it owns Company P Pty Ltd ( Company P ): ● Was registered with ASIC in 200A ● Owns the business that operates out of the Property owned by Company D ● The Family Trust (the Trust) ● Has owned G% of the shares in Company P since 200B ● Acquired C% of Company D in 200B, later increased to H% and then about E% ● Ceased operating a share trading business during the 2015-16 income year ● Has not carried on a business since the share trading activity ceased ● Does not have any other affiliates ● Is not connected to any other entities that carry on business ● Has a corporate trustee The Director ( Director ) is aged more than 55 years: ● Has owned D% of the shares in Company D since 200A ● Has owned D% of the shares in Company P since 200A ● Beneficially owns all the shares in the Trustee Company ● Is the sole director of Company D, Company P and the Trustee Company ● Does not carry on any businesses in their own name ● Does not have any other affiliates ● Is not connected to any other entities that carry on business The unrelated individual does not carry on any businesses in their own name or in the name of any other associated entities and none of those entities have any other connection to Company D or Company P. Company D acquired the Property some 15 years ago for use in a business to be carried on by Company P. It needed extensive work done prior to the commencement. Preparatory works commenced shortly after purchase and the construction of the main facility commenced about six months later. The first clients moved in about 14 years ago. They were clients of another business then conducted by other entities run by associated entities. Company P has operated the business from the Property from when the initial fitout was completed. The rent charged by Company D to Company P is lower than market reflecting the close family relationship between the companies. Company D has regularly paid expenses on behalf of Company P (and vice versa) and has subsequently been reimbursed. Company D has constructed facilities of a type and in a timeframe in accordance with the requirements of Company P. Company D has progressively built additional facilities on the Property each time the facility approached capacity. The 2016-17 income year provides representative figures for the operation of the Property. During this year, Company P earned about $1,000,000 from operating the business and paid about $350,000 to Company D for the use of the Property. Company D also earns some minor amounts of interest unrelated to the Property. Company P is an affiliate of Company D. The Property is an active asset and meets the active asset test being used in the business carried on by Company P (as an affiliate of Company D). The shares owned by the Director and the Trust in Company D are active assets and meet the active asset test as the Property, other active assets owned by Company D and associated assets have been greater than G% of the market value of all its assets for more than seven and a half years of the time they have owned the Company D shares (or more than half the ownership period where it is less than 15 years). The shares owned by the Director and the Trust in Company P are active assets and meet the active asset test as the active assets owned by Company P and associated assets have been greater than G% of the market value of all its assets for more than seven and a half years of the time they have owned the Persis shares (or more than half the ownership period where it is less than 15 years). The Director, the Trust, Company P and Company D each pass the maximum net asset value test as the net value of their CGT assets and the CGT assets of their connected entities and affiliates is less than $6,000,000. The shareholders of Company D and Company P have received several expressions of interest in acquiring either the shares in those companies or their assets. Assumptions For the purpose of this ruling, it is assumed that the following events will occur during the period of the ruling: ● Company D will continue to derive income consistent with the amount disclosed above while it continues to own the Property ● Company P will continue to derive income consistent with the amount disclosed above while it continue to own the business ● No other related entity will operate a business activity ● The Director and the Trust will sell their Company D shares for a capital gain ● The Director and the Trust will sell their Company P shares for a capital gain ● The Trust will distribute all of its income from the sale year to the Director and their spouse, and ● The Director will retire as part of the sale transaction.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 Part 3-3 | Income Tax Assessment Act 1997 Subdivision 328-C

Reasons for decision: Summary: The Trust will not satisfy the requirements of section 152-110 of the ITAA 1997 in respect of the sale of its Company P shares. | Detailed Reasoning - Detailed reasoning: Section 152-110 of the ITAA 1997 provides a CGT exemption if certain exemption conditions are satisfied. The relevant conditions for a trust selling a share in a company are: ● The basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the capital gain ● The trust seeking the CGT exemption has continuously owned the share for the 15 years period ending just before the time of the CGT event ● The trust had a significant individual for a total of at least 15 years during which the trust owned the share, and ● The significant individual is 55 years or over at the time of the CGT event and the event happens in connection with their retirement. The basic conditions for a trust selling a share in a company are: ● A CGT event happens to the share owned by the trust ● The event would have resulted in a capital gain (before the application of Division 152 of the ITAA 1997) ● The trust passes one of the owner tests ● The share satisfies the active asset test, and ● CGT concession stakeholders in the object company must together have a small business participation percentage in the trust of at least I% Additional conditions need to be met if payments made to the CGT concession stakeholders in connection with the event are to be exempt from tax. The Trust’s situation One of the conditions listed above is that the trust seeking the CGT exemption must have continuously owned the share for the 15 years period ending just before the time of the CGT event. The Trust acquired its Company P shares in 2009 and has not yet held them for 15 years. Therefore, the Trust will fail to meet the 15 year ownership condition and not be eligible for the CGT exemption provided by section 152-110 of the ITAA 1997 in respect of the sale of its Company P shares. Note: This private ruling applies the CGT small business concessions as currently enacted. It does not consider the possible application of announced but unenacted legislation that may have effect from 1 July 2017. Draft legislation related to CGT events that happen to shares was released on 8 February 2018. Paragraph 51 of Taxation Ruling TR 2006/11 (paraphrasing section 357-85 of Schedule 1 to the Taxation Administration Act 1953 ) states: | Detailed Reasoning - The status of private rulings following a rewrite of the law: 51. Where a relevant provision is re-enacted or remade, an earlier private ruling is taken to be about the re-enacted or remade provision insofar as the new law expresses the same ideas as the old law. However, if the law has been substantively changed, the part of the private ruling dealing with the changed law ceases to apply. | Summary: The Trust will not satisfy the requirements of section 152-110 of the ITAA 1997 in respect of the sale of its Company D shares. | Detailed Reasoning - Detailed reasoning: Section 152-110 of the ITAA 1997 provides a CGT exemption if certain exemption conditions are satisfied. The relevant conditions for a trust selling a share in a company are: ● The basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the capital gain ● The trust seeking the CGT exemption has continuously owned the share for the 15 years period ending just before the time of the CGT event ● The trust had a significant individual for a total of at least 15 years during which the trust owned the share, and ● The significant individual is 55 years or over at the time of the CGT event and the event happens in connection with their retirement. The basic conditions for a trust selling a share in a company are: ● A CGT event happens to the share owned by the trust ● The event would have resulted in a capital gain (before the application of Division 152 of the ITAA 1997) ● The trust passes one of the owner tests ● The share satisfies the active asset test, and ● CGT concession stakeholders in the object company must together have a small business participation percentage in the trust of at least I% Additional conditions need to be met if payments made to the CGT concession stakeholders in connection with the event are to be exempt from tax. The Trust’s situation One of the conditions listed above is that the trust seeking the CGT exemption must have continuously owned the share for the 15 years period ending just before the time of the CGT event. The Trust acquired its Company D shares in 2009, 2014 and 2015 and has not yet held them for 15 years. Therefore, the Trust will fail to meet the 15 year ownership condition and not be eligible for the CGT exemption provided by section 152-110 of the ITAA 1997 in respect of the sale of its Company D shares. Note: This private ruling applies the CGT small business concessions as currently enacted. It does not consider the possible application of announced but unenacted legislation that may have effect from 1 July 2017. Draft legislation related to CGT events that happen to shares was released on 8 February 2018. Paragraph 51 of Taxation Ruling TR 2006/11 (paraphrasing section 357-85 of Schedule 1 to the Taxation Administration Act 1953 ) states: | Detailed Reasoning - The status of private rulings following a rewrite of the law: 51. Where a relevant provision is re-enacted or remade, an earlier private ruling is taken to be about the re-enacted or remade provision insofar as the new law expresses the same ideas as the old law. However, if the law has been substantively changed, the part of the private ruling dealing with the changed law ceases to apply.