Private ruling: mall business concessions
Date of advice: 23 May 2024
Published: 1 July 2024
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Has there been a change to the majority underlying interests in Company A post 19 September 1985 that would deem the property owned by Company A to be a post-CGT asset under Subdivision 149-B of the Income Tax Assessment Act 1997 ? | A1: No. | Q2: Does Company A satisfy the basic conditions for small business CGT concessions in section 152-10 of the Income Tax Assessment Act 1997 ? | A2: Yes. | Q3: If the answer to 2 is Yes, can Company A access the small business CGT 15-year exemption in subdivision 152-B of the Income Tax Assessment Act 1997 ? | A3: Yes. | Q4: If Yes to question 2 and 3, will the payment from Company A to Individual D and Individual E be exempt under section 152-125 of the Income Tax Assessment Act 1997 ? | A4: Yes. | Q5: If No to question 4, will section 47 of the Income Tax Assessment Act 1936 apply to the pre-CGT reserve account of Company A when it is distributed to its shareholders at liquidation by the liquidator? | A5: Not required as the Answer to Question 4 is Yes. | Q6: Will CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 arise when the liquidator makes a distribution to the shareholders of Company A at liquidation? | A6: Yes. | Q7: If yes to question 6, will the shareholders of Company A satisfy the basic conditions for small business CGT concessions in section 152-10 of the Income Tax Assessment Act 1997 in respect of the capital gain arising from the liquidator's distribution? | A7: Yes.

Relevant facts and circumstances: Company A was registered in Australia before 20 September 1985. The only asset Company A owns is a property it acquired before 20 September 1985. No improvements were made to the property post 19 September 1985 apart from minor repairs and maintenance. The property is estimated to be worth $XX according to a recent valuation. Company A has no liabilities. The property was used in a business undertaken by Company B, a connected trading entity, until Company B ceased business in the 20XX income year. Company B paid for all expenses and outgoings associated with the properties. There was no formal lease agreement/s between Company A and Company B. Shareholding history of Company A Company A has a total of XX shares on issue. The shareholding of Company A just before 20 September 1985 was: • Individual A - XX shares • Individual B - XX shares. Between 19 September 1985 and 30 June 1998, Individual A transferred a number of their shares in Company A to Individual C. Individual A passed away during 20XX and under their will their remaining shares in Company A were transferred to Individual B. Individual B passed away during 20XX and under their will their shares in Company A were transferred to their child, Individual D. During 20XX, Individual C sold XX of their shares in Company A to Company C and XX of their shares in Company A to Company D as trustee for Discretionary Trust (DTrust). The current shareholding of Company A is: • Individual D - XX shares • Company C - XX shares • DTrust - XX shares. All shares in Company A are ordinary shares carrying the same rights to voting, dividends and capital. Business group structure and activities Company B is controlled by Individual D who has owned more than XX% of the shares in Company B since 20XX. Individual D retired on the date Company B ceased business in the 20XX income year and does not foresee that they will ever again be employed for gain or reward. Individual D intends to sell the property held in Company A as soon as possible to fund their retirement. The sale proceeds will be credited to Company A's pre-CGT reserve account. If Company A is eligible to access the CGT 15-year exemption Individual D and their spouse, Individual E, will receive a payment or payments relating to the exempt amount, up to their small business participation percentage in Company A, before 2 years after the CGT event (the sale of the property). Company A will enter Members' Voluntary Liquidation (MVL). Individual D and Individual E have 50/50 ownership of trustee companies in the group structure, including Company C and Company D. The trustee companies have no assets or liabilities under their own name, apart from the XX Company A shares held by Company C and XX shares held by Company D as trustee for DTrust. DTrust owns the plant and equipment that was used in Company B's business. As a beneficiary, Individual D will receive XX% of the income and capital distribution from DTrust in the income year the pre-CGT reserve distribution at liquidation occurs. Company A will cease to exist within 18 months of the liquidator's distribution. Company B will be wound up in the income year Company A sells the property. The aggregated turnover of Company B for the income year ended 30 June 20XX, the income year it ceased business, is under $X million. The net value of the CGT assets of each shareholder of Company A, any entities connected with them, their affiliates or entities connected with their affiliates will not exceed $X million just before the relevant CGT event. The net value of the CGT assets of Company A, entities connected with Company A, any affiliates of Company A or entities connected with those affiliates, will not exceed $X million just before the relevant CGT event. No financial instruments or cash were obtained for a purpose that included assisting Company A to satisfy the active asset test.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 44 | Income Tax Assessment Act 1936 section 47 | Income Tax Assessment Act 1936 subsection 47(1) | Income Tax Assessment Act 1936 former subsection 82KZC(1) of the ITAA 1936 | Income Tax Assessment Act 1936 subdivision C of Division 20 of former Part IIIA | Income Tax Assessment Act 1936 former subsection 160ZZRR(1) | Income Tax Assessment Act 1936 former subsections 160ZZS(1) and 160ZZS(3) | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subsection 104-25(2) | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1997 subdivision 149-B | Income Tax Assessment Act 1997 section 149-10 | Income Tax Assessment Act 1997 section 149-15 | Income Tax Assessment Act 1997 subsections 149-15(1) to 149-15(5) | Income Tax Assessment Act 1997 section 149-30 | Income Tax Assessment Act 1997 subsections 149-30(1), 149-30(3) and 149-30(4) | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 subsections 152-10(1), 152-10(2), 152-10(1A) and 152-10(2A) | Income Tax Assessment Act 1997 subdivision 152-B | Income Tax Assessment Act 1997 subsection 152-75(1) | Income Tax Assessment Act 1997 section 152-65 | Income Tax Assessment Act 1997 subsection 152-70(1) | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 subsection 328-125(6) | Income Tax Assessment Act 1997 section 328-125 | Income Tax Assessment Act 1997 subsections 152-40(1), 152-40(3), 152-40(4) and 152-40(4A), | Income Tax Assessment Act 1997 subsections 152-35(1) and 152-35(2) | Income Tax Assessment Act 1997 subsections 152-20(1) and 152-20(2) | Income Tax Assessment Act 1997 section 152-15 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 section 152-125 | Income Tax Assessment Act 1997 subsections 152-125(1) to 152-125(3)

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise indicated. Division 149 determines when an asset acquired on or before 19 September 1985 stops being a pre-capital gains tax (CGT) asset. Section 149-10 states: A CGT asset that an entity owns is a pre-CGT asset if, and only if: (a) the entity last acquired the asset before 20 September 1985; and (b) the entity was not, immediately before the start of the 1998-99 income year, taken under: (i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 ; or (ii) Subdivision C of Division 20 of former Part IIIA of that Act; to have acquired the asset on or after 20 September 1985; and (c) the asset has not stopped being a pre-CGT asset of the entity because of this Division. Subdivision C of Division 20 of former Part IIIA of the ITAA 1936 applies to public entities. Once it is established that the asset has been acquired before 20 September 1985, it is necessary to consider if former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA 1936)would apply. This subsection deals with changes in majority ownership of an asset, between 19 September 1985 and 30 June 1998. Former subsection 160ZZS(1) of the ITAA 1936 applied to pre-CGT assets held between 20 September 1985 and the end of the 1998 income year as follows: 160ZZS(1) Deemed acquisition after 19 September 1985 For the purposes of the application of this Part in relation to a taxpayer, an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset. Up until 19 January 1997, former subsection 160ZZS(3) of the ITAA 1936 defined majority underlying interests when applying 160ZZS(1) as having the same meaning as in Subdivision 3G of Part III. Majority underlying interests in relation to property was defined in former subsection 82KZC(1) of the ITAA 1936 to mean more than one-half of: (a) The beneficial interests that natural persons hold (whether directly or through one or more interposed companies, partnerships or trusts) in the property, and (b) The beneficial interests held by natural persons (whether directly or through one or more interposed companies, partnerships or trusts) in any income that may be derived from the property. From 20 January 1997, majority underlying interests was defined in former subsection 160ZZRR(1) of the ITAA 1936 to mean in relation to an asset, more than one-half of: (a) The beneficial interests that natural persons hold (whether directly or indirectly) in the asset, and (b) The beneficial interests held by natural persons (whether directly or indirectly) in any income that may be derived from the asset. Taxation Ruling IT 2340 Income tax: capital gains: deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date provides guidance on the administration of former 160ZZS of the ITAA 1936. IT 2340 outlines that a change in the proportions in which majority underlying interests are held in a pre-CGT asset will not cause it to stop being a pre-CGT asset. If it has been determined that the the entity was not taken under former subsection 160ZZS(1) of the ITAA 1936 to have acquired the asset on or after 20 September 1985, then section 149-15 must be considered to determine whether the asset will continue to be a pre-CGT asset. From the 1999 income year onwards, subsection 149-15(1) defines majority underlying ownership as being more than 50% of: (a) the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and (b) the beneficial interests that ultimate owners have (whether directly or indirectly) in any income that may be derived from the asset. Subsection 149-15(3) defines an 'ultimate owner' to include an individual. It does not include companies that can make distributions to its members, and it does not include trusts. This means that ultimate owners must have beneficial interests in both the underlying pre-CGT asset and any ordinary income that may be derived from that underlying pre-CGT asset. Indirect beneficial interests are defined by subsections 149-15(4) and 149-15(5) as follows: An ultimate owner indirectly has a beneficial interest in a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if: (a) the other entity were to distribute any of its capital; and (b) the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner. An ultimate owner indirectly has a beneficial interest in ordinary income that may be derived from a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of a dividend or income if: (a) the other entity were to pay that dividend, or otherwise distribute that income; and (b) the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner. | Detailed Reasoning - New owner standing in for former owner: Under section 149-30, an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985. Where shares are transferred to a person upon the death of another person, that person is taken to have held the same interests as those held by the former owner (item 2 of subsection 149-30(3)). The new owner is taken to have an underlying interest in the asset equal to the sum of their original interest and the lesser of the acquired interest or the former owner's interest at any time when the former owner had a percentage of the underlying interests in the asset (subsection 149-30(4)). The combined effect of subsections 149-30(3) and 149-30(4) is that the new owner of the underlying interest in the asset is taken to stand in the shoes of the former owner. In essence, there is no change in majority underlying interests in an asset from this event. | Detailed Reasoning - Application to the present circumstances: Company A acquired the property before 20 September 1985. No improvements were made to the property post 19 September 1985 apart from minor repairs and maintenance. Accordingly, Company A last acquired the property before 20 September 1985. As Company A is a private company, and not a public entity, Subdivision C of Division 20 of former Part IIIA of the ITAA 1936 will not apply. However, Subdivision 149-B will apply. Individual A and Individual B were the shareholders of Company A before 20 September 1985 and treated as having beneficial interests in the property. They would be the ultimate owners of Company A's assets, with the interests in the assets and any income derived from the assets represented by their shareholdings. Immediately before 20 September 1985, until the end of the 1998 income year, Company A continuously held the direct legal and beneficial ownership of its pre-CGT asset, being the property. While there was not a change in the direct ownership of Company A's pre-CGT property there was a change in the pre-CGT shareholding of Company A when, between 19 September 1985 and 30 June 1998, Individual A transferred a number of their shares to Individual C. Consequently, Individual A's shareholdings became XX% of the total ownership interests in Company A, Individual B's shareholding XX% and Individual C's shareholding XX%. Combined, Individual A and Individual B held XX% of Company A's shareholding, meaning they still held the majority underlying interests. There were no other changes to Company A's shareholdings, legal or beneficial, during the period. Accordingly, the Commissioner is satisfied that the majority underlying interests in Company A's pre-CGT assets have been maintained up until the end of the 1998 income year by the same persons who held majority underlying interests in those assets immediately before 20 September 1985. After the start of the 1998-99 income year, changes to Individual A's and Individual B's combined XX% shareholding occurred on their passing as follows: When Individual B inherited Individual A's XX shares (equating to XX%), they are treated as standing in the shoes of Individual A, as though they had owned the shares since immediately prior to 20 September 1985. When Individual D inherited Individual B's XX shares (equating to XX%) they are treated as standing in the shoes of Individual B as though they had owned the shares since immediately prior to 20 September 1985. Additionally, when Individual D inherited Individual B's XX shares that Individual B had inherited from Individual A, Individual D was treated as standing in the shoes of Individual B, who was in turn standing in the shoes of Individual A. As a result of subsections 149-30(3) and 149-30(4), Individual D is taken to have continuously held the XX shares in Company A, being a XX% shareholding, since immediately prior to 20 September 1985. | Detailed Reasoning - Conclusion: The majority underlying interests in Company A's pre-CGT asset has been maintained. Division 149 has not affected the pre-CGT status of the property. | Summary: Company A satisfies the basic conditions for small business CGT concessions. | Detailed Reasoning - Detailed reasoning: All legislative references are to the Income Tax Assessment Act 1997 The basic conditions for relief under the small business CGT concessions are outlined in subsection 152-10(1). These conditions are: (a) a CGT event happens in relation to a CGT asset of yours in an income year (b) the event would (apart from this Division) have resulted in the gain (c) at least one of the following applies: (i) you are a CGT small business entity for the income year (ii) you satisfy the maximum net asset value (MNAV) test (iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership (iv) the conditions mentioned in subsection 152-10(1A) or (1B) are satisfied in relation to the CGT asset in the income year (d) the CGT asset satisfies the active asset test. Consideration of these requirements in the current circumstances is examined below. | Detailed Reasoning - Basic condition (a) of subsection 152-10(1) - a CGT event happens in relation to a CGT asset of yours in an income year: A CGT asset is defined in subsection 108-5(1) as any kind of property or a legal or equitable right that is not property. Note 1 to section 108-5 lists some examples of CGT assets which include 'land and buildings'. The property owned by Company A is therefore a CGT asset. Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. CGT event A1 will happen upon Company A entering into a sale contract in respect of the properties. The condition in paragraph 152-10(1)(a) is therefore satisfied. | Detailed Reasoning - Basic condition (b) of subsection 152-10(1) - The event would have resulted in the gain: Subsection 104-10(4) provides that you make a capital gain from CGT event A1 if the capital proceeds from the disposal are more than the asset's cost base. Company A is expected to make a capital gain on the sale of the property. The condition in paragraph 152-10(1)(b) is therefore satisfied. | Detailed Reasoning - Basic condition (c) of subsection 152-10(1) - at least one of the requirements in paragraph 152-10(1)(c) applies: Paragraph 152-10(1)(c) requires that at least one of the requirements in subparagraphs 152-10(1)(c)(i) to 152-10(1)(c)(iv) applies. One of the requirements, in subparagraph 152-10(1)(c)(ii), is that you satisfy the MNAV test. Section 152-15 outlines the requirements to satisfy the MNAV test. It provides 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)). The ' net value of the CGT assets ' of an entity is defined in subsection 152-20(1) as the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of: (a) the liabilities of the entity that are related to the assets; and (b) the following provisions made by the entity: (i) provisions for annual leave (ii) provisions for long service leave (iii) provisions for unearned income (iv) provisions for tax liabilities. Subsection 152-20(2) relevantly provides that shares, units or other interests (except debt) in another entity that is connected with the first-mentioned entity or with an affiliate of the first-mentioned entity are disregarded when working out the net value of the CGT assets of an entity, but includes any liabilities related to any such shares, units or interests. Company A satisfies the MNAV test because the sum of the net value of the CGT assets of Company A and entities connected with Company A does not exceed $6 million. This will remain the situation up to just before the CGT event. As Company A satisfies the MNAV test in subparagraph 152-10(1)(c)(ii), the condition in paragraph 152-10(1)(c) is satisfied. | Detailed Reasoning - Basic condition (d) of subsection 152-10(1) - the CGT asset satisfies the active asset test: A CGT asset satisfies the active asset test if: (a) 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 (b) 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 (subsection 152-35(1)). Subsection 152-35(2) provides that the test period is from when the asset is acquired until the CGT event. If the business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. Company A acquired its interest in the property before 20 September 1985 and intends to dispose of the property in the period for the ruling. The relevant period is from acquisition to the date that Company B ceased operating its business on the property. As Company A has owned the property for more than 15 years, it must be an active asset for at least 7½ years. | Detailed Reasoning - Meaning of active asset: Under subsection 152-40(1), a CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use, in the course of carrying on a business by you; or your affiliate; or by another entity that is connected with you. In the present circumstances Company B used the property owned by Company A in the course of carrying on its business. Company B is connected with Company A as both companies are controlled by Individual D. Paragraph 152-40(4)(e) states that an asset whose main use by you is to derive rent cannot be an active asset. This exception does not apply in the present circumstances as subsection 152-40(4A) states that for the purposes of paragraph 152-40(4)(e), in determining the main use of an asset, treat any use by an entity that is connected with you, as your use. Accordingly, the property was an active asset for more than 7½ years and satisfies the active asset test. The condition in paragraph 152-10(1)(d) is therefore satisfied. | Detailed Reasoning - Conclusion: Based on the above analysis, Company A satisfies the basic conditions for small business relief in section 152-10 in respect of the sale of the property. | Summary: Company A can access the small business CGT 15-year exemption. | Detailed Reasoning - Detailed reasoning: All legislative references are to the Income Tax Assessment Act 1997 | Detailed Reasoning - 15-year exemption - conditions for companies and trusts: The 15-year exemption in Subdivision 152-B allows an entity to disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met. Subsection 152-110(1) provides that a company can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied: (a) the basic conditions in Subdivision 152-A are satisfied for the gain (b) the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event (c) the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset, and (d) an individual who was a significant individual of the company or trust just before the CGT event either: (i) was 55 or over at that time and the event happened in connection with the individual's retirement; or (ii) was permanently incapacitated at that time. | Detailed Reasoning - Paragraph 152-110(1)(a) - the basic conditions in Subdivision 152-A are satisfied for the gain: As concluded in Question 2, Company A meets the basic conditions in Subdivision 152-A in respect of the anticipated capital gain on its pre-CGT interest in the property and therefore satisfies the requirements in paragraph 152-110(1)(a). | Detailed Reasoning - Condition of Paragraph 152-110(1)(b) - the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event: Company A acquired the property before 20 September 1985 and will continue to own it until it is sold. The requirement in paragraph 152-110(1)(b) is therefore satisfied. Condition of Paragraph 152-110(1)(c) - the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset The term 'significant individual' is defined in section 152-55. An individual is a significant individual in a company or a trust at a time if, at that time, the individual has a 'small business participation percentage' in the company or trust of at least 20%. Under section 152-65, an entity's small business participation percentage in another entity is the sum of the entity's direct and indirect small business participation percentages in the other entity. The table in subsection 152-70(1) provides that an entity's direct small business participation percentage in a company at the relevant time is the percentage of the voting power, entitlement to dividends and capital an entity has because of the shares it holds in the company. If these amounts are different, the smallest amount is used. Individual A and Individual B were each a significant individual in Company A, having a 'small business participation percentage' in the company of at least 20% from before 20 September 1985 to the date each passed away. Before 20 September 1985, Individual A owned XX% of the shares in Company A and Individual B owned XX%. After Individual A transferred a number of their shares to Individual C, Individual A still owned XX% of the shares in Company A. On the transfer of Individual A's XX shares in Company A to Individual B following their death in 20XX, Individual B held XX% of the shares in Company A. Individual D became a significant individual in Company A when Individual B's XX shares in Company A were transferred to Individual D following Individual B's death in 20XX. This gave Individual D a XX% shareholding in Company A, and small business participation percentage of XX%. Individual D will remain the holder of these XX shares in Company A while the property is owned by Company A. Accordingly, paragraph 152-110(1)(c) is satisfied as Company A has had a significant individual for a total of at least 15 years during the time the company has owned the property. | Detailed Reasoning - (ii) was permanently incapacitated at that time.: Individual D will be a significant individual of Company A just before the CGT event (the sale of the property) and is over 55. Individual D retired in the 20XX income year when Company B ceased business and the property owned by Company A will be sold to fund Individual D's retirement. The sale of the property is considered in connection with Individual D's retirement. Therefore, the condition in paragraph 152-110(1)(d) will be satisfied. | Detailed Reasoning - Conclusion: Company A will be able to access the small business 15-year exemption as all of the conditions in subsection 152-110(1) are satisfied. | Summary: The payment or payments from Company A to Individual D and Individual E will be exempt under section 152-125. | Detailed Reasoning - Detailed reasoning: All legislative references are to the Income Tax Assessment Act 1997 Section 152-125 provides an exemption for payments made by a company or trust to its CGT concession stakeholders. Subsection 152-125(1) states that section 152-125 applies if: (a) one or more of the following apply: (i) under section 152-110, a capital gain (the exempt amount ) of a company or trust is disregarded (ii) under section 152-110, an amount of income (the exempt amount ) is non-assessable non-exempt income of a company or trust (iii) subparagraph (i) of this paragraph would have applied to an amount (the exempt amount ) except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985 (iv) subparagraph (i) of this paragraph would have applied to an amount (the exempt amount ) if subsection 149-30(1A) and section 149-35 had not applied to the relevant asset; and (b) the company or trust makes one or more payments relating to the exempt amount to an individual (whether directly or indirectly through one or more interposed entities) before the later of: (i) 2 years after the relevant CGT event; and (ii) if the relevant CGT event happened because the company or trust disposed of the relevant CGT asset - 6 months after the latest time a possible financial benefit becomes or could become due under a look-through earnout right relating to that CGT asset and the disposal; and (c) the individual was a CGT concession stakeholder of the company or trust just before the relevant CGT event. Subsection 152-125(2) states that in determining the taxable income of the company, the trust, the individual, or any of the interposed entities, disregard the total amount of the payment or payments made to the CGT concession stakeholder, up to the following limit: Stakeholder's participation percentage x Exempt amount. Subsection 152-125(3) adds that if a company makes such a payment, this Act applies to the disregarded payment as if it were not a dividend or a frankable distribution. Even though Company A can disregard the capital gain it will make on the sale of the property as it was acquired before 20 September 1985, Company A can access the small business CGT 15-year exemption under section 152-110 in respect of the capital gain. Accordingly, subparagraph 152-125(1)(a)(iii) applies. One or more payments of the exempt amount will be made to Individual D and Individual E before 2 years after the sale of the property and/or liquidation of Company A. Therefore, the requirement in paragraph 152-125(1)(b) will be satisfied. | Detailed Reasoning - CGT concession stakeholder: Section 152-60 states that an individual is a CGT concession stakeholder of a company or trust at a time if the individual is: (a) a significant individual in the company or trust; or (b) a spouse of a significant individual in the company or trust, if the spouse has a small business participation percentage in the company or trust at that time that is greater than zero. Defined in section 152-55, an individual is a significant individual in a company or a trust at a time if, at that time, the individual has a small business participation percentage in the company or trust of at least 20%. Under section 152-65, an entity's small business participation percentage in another entity at a time is the percentage that is the sum of: (a) the entity's direct small business participation percentage in the other entity at that time; and (b) the entity's indirect small business participation percentage in the other entity at that time. As per the table in subsection 152-70(1), an entity's direct small business participation percentage in a company is the percentage of: • voting power that the entity is entitled to exercise • any dividend payment that the entity is entitled to receive • any capital distribution that the entity is entitled to receive, or • if they are different, the smallest of the three percentages above. Subsection 152-75(1) states that you work out the indirect small business participation percentage that an entity (the holding entity ) holds at a particular time in another entity (the test entity ) by multiplying: (a) the holding entity's direct small business participation percentage (if any) in another entity (the intermediate entity ) at that time; by (b) the sum of: (i) the intermediate entity's direct small business participation percentage (if any) in the test entity at that time; and (ii) the intermediate entity's indirect small business participation percentage (if any) in the test entity at that time (as worked out under one or more other applications of this section). | Detailed Reasoning - Application to Individual D: Individual D holds XX of the issued shares in Company A. All shares in Company A are ordinary shares carrying the same rights to voting, dividends and capital. Individual A's direct small business participation percentage in Company A is therefore XX%. Individual D is a significant individual in Company A as they have more than a 20% small business participation percentage in Company A and is therefore a CGT concession stakeholder. The requirement in paragraph 152-125(1)(c) is satisfied at this point. Individual D also has indirect small business participation percentages in Company A through DTrust and through Company C. Applying subsection 152-75(1) to work out Individual D's indirect small business participation percentage, Individual D is the holding entity, Company A the test entity and DTrust and Company C the intermediate entity in each calculation. As Individual D will receive XX% of the distribution from DTrust in the CGT event year they have a direct small business participation percentage of XX% in DTrust. DTrust has a direct small business participation percentage of XX% in Company A as it owns XX% of the shares in Company A. Accordingly, Individual D's indirect small business participation percentage in Company A in respect of DTrust is Individual D's direct small business participation percentage in DTrust multiplied by DTrust's direct small business participation percentage in Company A = XX%. Individual D owns XX% of the shares in Company C and Company C owns XX of the XX issued shares in Company A. Company C therefore has a direct small business participation percentage in Company A of XX%. Individual D's indirect small business participation percentage in Company A in respect of Company C is: Individual D's direct small business participation percentage in Company C multiplied by Company C's direct small business participation percentage in Company A = XX%. Individual D's small business participation percentage in Company A is therefore XX% being the sum of their direct small business participation percentage of XX% and their total indirect small business participation percentage of XX%. | Detailed Reasoning - Application to Individual E: Individual E is Individual D's spouse and Individual D is a significant individual in Company A. For Individual E to be a CGT concession stakeholder they must have a small business participation percentage in Company A that is greater than zero. As Individual E is not a shareholder of Company A, they do not have a direct small business participation percentage in Company A. Applying subsection 152-75(1) to work out Individual E's indirect small business participation percentage, Individual E is the holding entity, Company A the test entity and Company C the intermediate entity. Company C holds XX of the XX issued shares in Company A therefore Company C has a direct small business participation percentage in Company A of XX%. Individual E owns XX% of the shares in Company C so has a direct small business participation percentage in Company C. Individual E's indirect small business participation percentage in Company A is: Individual E's direct small business participation percentage in Company C multiplied by Company C's direct small business participation percentage in Company A = XX%. As this is greater than zero, Individual E is a CGT concession stakeholder of Company A. As Individual D and Individual E will be CGT concession stakeholders of Company A when the property is sold, the requirement in paragraph 152-125(1)(c) is satisfied. Under subsection 152-125(2), Individual D will be able to disregard XX% of the exempt amount paid to them by Company A and Individual E will be able to disregard XX% of the exempt amount paid to them by Company A. | Detailed Reasoning - Question 5: Not required as the Answer to Question 4 is Yes. | Summary: CGT event C2 will apply to the liquidator's distribution on cancellation of Company A's shares. | Detailed Reasoning - Detailed reasoning: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise indicated. Section 104-25 states that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or.... Subsection 104-25(2) states that the time of the event is when you enter into the contract that results in the asset ending or if there is no contract, when the asset ends. The Commissioner's view on the treatment of liquidator's distributions for capital gains tax purposes is outlined in Taxation Determination 2001/27 Income tax: capital gains: how do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 ('ITAA 1997') treat: (a) a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the Income Tax Assessment Act 1936 ('ITAA 1936') to be a dividend; and (b) an interim liquidation distribution to the extent it is not deemed to be a dividend by subsection 47(1)? TD 2001/27 explains that the full amount of a distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company. Where the company is wound up within 18 months of the distribution, the relevant CGT event for the company's shareholders will be CGT event C2. The anti-overlap provision in section 118-20 reduces any capital gain by amounts that are otherwise assessable as a result of the event. Accordingly, any component of the liquidator's distribution that would be a dividend under subsection 47(1) of the ITAA 1936 will reduce the capital gain, as the amount will be otherwise assessable as a dividend under section 44 of the ITAA 1936. In the present circumstances, Company A's shareholders acquired their shares post-CGT. Their shares will be cancelled at liquidation and Company A will be wound up within 18 months of the liquidator's distribution. CGT event C2 will therefore occur on the cancellation of the shareholder's shares at liquidation. The liquidator's distribution will be included in the proceeds to work out any capital gain or loss from the event. As the portion of the liquidator's distribution appropriated from the pre-CGT reserve account is not an assessable dividend under subsection 47(1) of the ITAA 1936, the anti-overlap provision will not apply to this component. | Summary: The shareholders of Company A satisfy the basic conditions for small business CGT concessions in respect of the capital gain arising from the liquidator's distribution. | Detailed Reasoning - Detailed reasoning: All legislative references are to the Income Tax Assessment Act 1997 . The basic conditions for relief under the small business CGT concessions are outlined in subsection 152-10(1). These conditions are: (a) a CGT event happens in relation to a CGT asset of yours in an income year (b) the event would (apart from this Division) have resulted in the gain (c) at least one of the following applies: (i) you are a CGT small business entity for the income year (ii) you satisfy the maximum net asset value (MNAV) test (iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership (iv) the conditions mentioned in subsection 152-10(1A) or 152-10(1B) are satisfied in relation to the CGT asset in the income year. (d) the CGT asset satisfies the active asset test. Consideration of each of these requirements in respect of the shares in Company A and the shareholders is examined below. | Detailed Reasoning - Basic condition (a) of subsection 152-10(1) - A CGT event happens in relation to a CGT asset of yours in an income year: A CGT asset is defined in subsection 108-5(1) as any kind of property or a legal or equitable right that is not property. Note 1 to section 108-5 provides some examples of CGT assets which include 'shares in a company'. The shares in Company A are property and therefore CGT assets as defined by section 108-5. Each share is an intangible CGT asset. As covered in Question 6, CGT event C2 will happen on the cancellation of the Company A shares at liquidation. The condition in paragraph 152-10(1)(a) is therefore satisfied. | Detailed Reasoning - Basic condition (b) of subsection 152-10(1) - The event would have resulted in the gain: It is expected that all the shareholders will make a capital gain on the ending of their Company A shares at liquidation. The condition in paragraph 152-10(1)(b) is therefore satisfied. | Detailed Reasoning - Basic condition (c) of subsection 152-10(1) - at least one of the tests in paragraph 152-10(1)(c) applies: Paragraph 152-10(1)(c) requires that at least one of the requirements in subparagraphs 152-10(1)(c)(i) to 152-10(1)(c)(iv) applies. One of these requirements, in subparagraph 152-10(1)(c)(ii), is that you satisfy the MNAV test. Section 152-15 outlines the requirements to satisfy the MNAV test. It provides 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)). The ' net value of the CGT assets ' of an entity is defined in subsection 152-20(1) as the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of: (a) the liabilities of the entity that are related to the assets; and (b) the following provisions made by the entity: (i) provisions for annual leave (ii) provisions for long service leave (iii) provisions for unearned income (iv) provisions for tax liabilities. When working out the net value of the CGT assets of an entity, subsection 152-20(2) provides that shares, units or other interests (except debt) in another entity that is connected with the first-mentioned entity, or with an affiliate of the first-mentioned entity, are disregarded, but any liabilities related to any such shares, units or interests are included. The net value of the CGT assets of each shareholder of Company A, any entities connected with them, their affiliates or entities connected with their affiliates does not exceed $6 million and this will be the case just before the CGT event (when their shares end at liquidation). As all shareholders satisfy the MNAV test in subparagraph 152-10(1)(c)(ii), they each meet the requirements of paragraph 152-10(1)(c). | Detailed Reasoning - Basic condition (d) of subsection 152-10(1) - the CGT asset satisfies the active asset test: A CGT asset satisfies the active asset test if: (a) 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 (b) 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 (subsection 152-35(1)). Subsection 152-35(2) provides that the test period is from when the asset is acquired until the CGT event. If the relevant business ceases within the 12 months before the CGT event (or such longer time as the Commissioner allows) the relevant period is from acquisition until the business ceases. The test time for Individual D is from when they acquired their shares on the date of death of Individual B and ends when the relevant business operated by Company B ceased. The test time for DTrust and for Company C is from when they acquired their shares from Individual C and ends when the relevant business operated by Company B ceased. As all shareholders have owned their shares in Company A for less than 15 years, the shares must have been an active asset for a total of at least half of the test period. | Detailed Reasoning - Meaning of active asset: Under subsection 152-40(1), a CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. Subsection 152-40(3) states that a CGT asset is also an active asset at a given time if, at that time, you own it and: it is either a share in a company that is an Australian resident at that time or an interest in a trust that is a resident trust for CGT purposes for the income year in which that time occurs, and the total of: (i) the market values of the active assets of the company or trust, and (ii) 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 (iii) 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 the assets of the company or trust. Company A is an Australian resident. The only asset Company A holds is the property which was used by connected entity Company B in its business until it ceased business in 20XX. At no time has the sum of the market value of Company A's active assets, and any financial instruments and cash inherently connected with the business been less than 80% of the market value of all Company A's assets. Accordingly, it is considered that the shares in Company A held by the shareholders were active assets for more than half the test period and therefore they satisfy the active asset test and paragraph 152-10(1)(d). | Detailed Reasoning - Additional basic conditions for shares in a company or interests in a trust: Subsection 152-10(2) sets-out additional basic conditions that must be satisfied if the CGT asset is a share in a company (the object entity ). These conditions must be satisfied in the present circumstances because the shares in Company A will be cancelled, and apply as follows: Additional basic condition (a) of subsection 152-10(2) - the CGT asset would still satisfy the active asset test if the assumptions in subsection 152-10(2A) were made Subsection 152-10(2A) provides that, for the purposes of paragraph 152-10(2)(a), in working out whether subsection 152-40(3) applies at a given time (the test time ) assume that: (a) an asset of a company or trust is covered by neither: (i) subparagraph 152-40(3)(b)(ii) (about financial instruments), nor (ii) subparagraph 152-40(3)(b)(iii) (about cash) if the company or trust acquired that asset for a purpose that included assisting an entity to otherwise satisfy paragraph 152-10(2)(a) of this section, and (b) paragraph 152-40(3)(b) does not cover an asset that: (i) is a share in a company, or an interest in a trust, (the later entity ), and (ii) is held at the test time by the object entity directly or indirectly (through one or more interposed entities), and (c) subparagraph 152-40(3)(b)(i) also covers each asset that: (i) is held at the test time by a later entity covered by subsection 152-10(2B), and (ii) is, for that later entity, an asset of a kind referred to in subparagraph 152-40(3)(b)(i), (ii) or (iii), as modified by paragraphs (a) and (b) of this subsection, and (d) subject to paragraph (b) of this subsection, all of the assets of the object entity at the test time included all of the assets of each later entity at the test time, and (e) for the purposes of paragraph 152-40(3)(b), the market value at the test time of an asset held by a later entity were the product of: (i) the asset's market value, apart from this paragraph, at the test time, and (ii) the object entity's small business participation percentage in the later entity at the test time. In the present circumstances, the only asset Company A owns is the property. The shares in Company A would still satisfy the active asset test if the assumptions in subsection 152-10(2A) were made. The condition in paragraph 152-10(2)(a) is therefore satisfied. Additional basic condition (b) of subsection 152-10(2) - if you do not satisfy the MNAV test - you are carrying on a business just before the CGT event Each shareholder of Company A satisfies the MNAV test therefore this condition does not apply. Additional basic condition (c) of subsection 152-10(2) - either: (i) the object entity (Company A) would be a CGT small business entity for the income year , or | Detailed Reasoning - if the following assumptions were made:: (iii) the only CGT assets or annual turnovers considered were those of the object entity, each affiliate of the object entity, and each entity controlled by the object entity in a way described in section 328-125 | Detailed Reasoning - (v) no determination under subsection 328-125(6) were in force.: The net value of the CGT assets of Company A, entities connected with Company A, any affiliates of Company A or entities connected with those affiliates does not exceed $6 million. No other entity's assets would be included if the assumptions in subparagraphs 152-10(2)(c)(iii), (iv) and (v) were made. The condition in paragraph 152-10(2)(c) is therefore satisfied. | Detailed Reasoning - CGT concession stakeholder: Section 152-60 advises that an individual is a CGT concession stakeholder of a company if they are: (a) a significant individual in the company; or (b) a spouse of a significant individual in the company, if the spouse has a small business participation percentage in the company at that time that is greater than zero. | Detailed Reasoning - Significant individual: Defined in section 152-55, an individual is a significant individual in a company at a time if, at that time, the individual has a small business participation percentage in the company of at least 20%. | Detailed Reasoning - Small business participation percentage: Under section 152-65, an entity's small business participation percentage in another entity at a time is the percentage that is the sum of: (a) the entity's direct small business participation percentage in the other entity at that time; and (b) the entity's indirect small business participation percentage in the other entity at that time. As per the table in subsection 152-70(1), an entity's direct small business participation percentage in a company is the smallest percentage out of: • voting power that the entity is entitled to exercise • any dividend payment that the entity is entitled to receive • any capital distribution that the entity is entitled to receive. An entity's direct small business participation percentage in a discretionary trust (that is, a trust where entities do not have entitlements to all the income and capital of the trust, and the trust makes a distribution of income or capital) is the lower percentage of either distributions of: • income that the entity is beneficially entitled to during the income year; or • capital that the entity is beneficially entitled to during the income year. Relevantly in the present circumstances, under subsection 152-75(1), an entity's indirect small business participation percentage in a company is calculated by multiplying together the entity's direct participation percentage in an interposed entity and the interposed entity's total participation percentage (both direct and indirect) in the company. | Detailed Reasoning - (i) you are a CGT concession stakeholder in the object entity: Individual D is a CGT concession stakeholder in Company A and will be when the CGT event happens. Individual D therefore satisfies the condition in subparagraph 152-10(2)(d)(i). The condition in subparagraph 152-10(2)(d)(i) is not satisfied for DTrust or Company C as they are not individuals and therefore cannot be CGT concession stakeholders in Company A. | Detailed Reasoning - DTrust: The trustee for DTrust will distribute to Individual D XX% of DTrust's income for the income year in which the CGT event happens. This will result in Individual D having a direct small business participation percentage in DTrust of XX%, being more than 90%. Individual D is a CGT concession stakeholder in Company A and will be just before the CGT event. Accordingly, CGT concession stakeholders in Company A have a small business participation percentage in DTrust of at least 90% and the condition in subparagraph 152-10(2)(d)(ii) is satisfied. | Detailed Reasoning - Company C: Individual D and Individual E have 50/50 ownership of the shares in Company C. Individual D and Individual E are CGT concession stakeholders in Company A and will be just before the CGT event. Accordingly, CGT concession stakeholders in Company A have a small business participation percentage in Company C of at least 90%, satisfying the condition in subparagraph 152-10(2)(d)(ii) for Company C. | Detailed Reasoning - Conclusion: Based on the above analysis, the shareholders satisfy the basic conditions to access small business relief in section 152-10 in respect of the capital gain arising from the liquidator's distribution and ending of their shares in Company A. There may be other conditions that have to be satisfied before a particular concession is available. These are set out in the relevant sections.

Does Part IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'. | The majority underlying interests in Company A's pre-CGT assets have been maintained by the same persons who held majority underlying interests in those assets immediately before 20 September 1985 and accordingly Division 149 of the Income Tax Assessment Act 1997 has not impacted the pre-CGT status of Company A's pre-CGT assets. | Individual A passed away during 20XX and under their will their shares in Company A were transferred to Individual B.