Private ruling: Small business concessions - CGT stakeholder
Published: March 2014
Ruling period: 1 July 2012 to 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: A1: Yes

Relevant facts and circumstances: A company operated a business for over 15 years. The business premises were purchased over 15 years ago. There are XX ordinary shares in the company, each of which carries voting, dividend and capital rights. An individual holds some shares. 25% were acquired pre-CGT and a further 25% post CGT. The remaining 50% of the shares were held by another individual and became the sole asset of the estate at his death over two years ago. The deceased's Will provided that the beneficiaries shall stand possessed of the assets of the trust in equal shares as tenants in common. The market value of the business was the price for which it was sold to an arms length party. It was sold as a going concern that included other depreciable assets. The company has a significant individual. He has held a small business participation percentage in the company of more than 20% from a date before 20 September 1985 until just before the CGT event that was the sale of the business, a period greater than 15 years. There is no spouse who holds a small business participation percentage in the company of greater than zero. The business was sold in connection with the significant individual's retirement who was over the age of 55 years at the time the business was sold. The company fulfils the requirements for the small business CGT concession of the 15 year exemption by virtue of section 152-110 of the ITAA 1997. The company will enter a member's voluntary liquidation and the proceeds of the sale will be distributed by the liquidator to the shareholders, being the significant individual and the deceased's estate within eighteen months of the final distribution by the liquidator.

Relevant legislative provisions: Section 106-35 of the Income Tax Assessment Act 1997 | Section 152-60 of the Income Tax Assessment Act 1997 | Section 152-70 of the Income Tax Assessment Act 1997 | Section 152-75 of the Income Tax Assessment Act 1997 | Section 152-110 of the Income Tax Assessment Act 1997 | Division 40 of the Income Tax Assessment Act 1997 | Division 328 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Mr X was the sole significant individual of the company on the date it sold the business. The company fulfilled the requirements of section 152-110 of the ITAA 1997 that describes the small business CGT concession that is the 15 year exemption for companies. Subject to any balancing adjustment events occurring for a depreciating asset whose decline in value was worked out under Division 40 of the ITAA 1997 or a deduction which was calculated under Division 328 of the ITAA 1997, the remainder of the capital proceeds are a disregarded capital gain for the company. The company is to enter voluntary liquidation and the liquidator will distribute the capital proceeds to the shareholders of the company. Section 106-35 of the ITAA 1997 provides that an act done by a liquidator for CGT purposes is the same as if the act was performed by the company. Payments to a company's CGT concession stakeholders are also exempt pursuant to section 152-125 of the ITAA 1997 when a capital gain of the company is disregarded under subsection 152-110 of the ITAA 1997(exempt amount). Paragraph152-125(1)(b) requires the payments in relation to the exempt amount to be made within two years of the CGT event to the individual who is the CGT concession stakeholder of the company. The payments to a CGT concession stakeholder may be made directly or indirectly through one or more interposed entities. Section 152-60 of the ITAA 1997 defines a CGT concession stakeholder as a significant individual in the company or a spouse of the individual who has a small business participation percentage greater than zero in their own right. Mr X was the sole significant individual of the company and is therefore a CGT concession stakeholder. No other individual is a significant individual of the company or a spouse of a significant individual with a small business participation percentage greater than zero. In determining the amount of a payment to a CGT concession stakeholder that is disregarded, subsection 152-125(2) of the ITAA 1997 requires the CGT stakeholder participation percentage to be calculated and multiplied by the exempt amount. This requires Mr X to assess his direct (section 152-70 of the ITAA 1997) and indirect (section 152-75 of the ITAA 1997) small business participation percentage in the company at the time of the CGT event. Pursuant to section 152-70, he held 50% of the legal and equitable interests in the company directly. Indirectly, under section 152-75, he held a percentage of the Estate's 50% interest in the company as an indirect small business participation percentage. Cumulatively, this gives Mr X as the CGT concession stakeholder a small business participation percentage in the company of xx% when the company sold the business. The liquidator will distribute the exempt amount of the company with two years of the CGT event that occurred. Mr X will receive 50% of the exempt amount directly from the liquidator and a further percentage indirectly from the estate as a beneficiary. As a CGT concession stakeholder, Mr X is entitled to disregard xx% of the exempt amount pursuant to section 152-125(2) of the ITAA 1997.

Subject: Small business concessions - CGT stakeholder: Will the distribution of the disregarded capital gain by the liquidator to a CGT concession stakeholder be exempt pursuant to section 152-125 of the ITAA 1997?